(Updates trading, adds comments; changes byline, dateline, previous LONDON)
* British election sees government losing majority
* Pound falls to two-month low around $1.27 in erratic trade
* Oil's price fall stalls despite supply glut
By Herbert Lash
NEW YORK, June 9 (Reuters) - The British pound plunged to a seven-week low on Friday after a shock election result cast doubt on Britain's talks to leave the European Union, but global equity markets rallied with key indices on Wall Street hitting new record highs.
British Prime Minister Theresa May said she would form a government backed by a small Northern Irish party after her Conservative Party lost its parliamentary majority in a vote on Thursday just days before the EU departure talks begin.
After an initial plunge, sterling pared losses against the dollar and euro, while the dollar gained. Safe-haven gold and prices of U.S. Treasuries drifted lower.
The pound shed more than 2 percent against the dollar, dropping as low as $1.2636 before trimming losses.
The impact of the British election on the U.S. markets was limited.
"Markets are celebrating gridlock again, which is a reversal of what we saw after the U.S. election," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
Ablin said over the past 12 months, central banks, including the Federal Reserve, have pumped almost $2 trillion into capital markets, which has driven asset prices higher.
"If there's one metric that I'm going track, to determine whether or not I want to stay engaged in risk-taking, it's going to be that liquidity. If I get a sense the Fed or other central banks will start to close up shop on that, we're going to reduce risk," Ablin said.
Equity market rallied, with European shares closing higher after early signs of skittishness. Britain's FTSE 100 index rose 1 percent, and the pan-regional FTSEurofirst 300 index of leading European shares rose 0.36 percent to 1,534.20.
MSCI's all-country stock world stock index <.MIWD00000PUS) gained 0.27 percent.
Stocks on Wall Street set new intra-day highs. The Dow Jones Industrial Average rose 98.34 points, or 0.46 percent, to 21,280.87. The S&P 500 gained 10.14 points, or 0.42 percent, to 2,443.93 and the Nasdaq Composite added 3.30 points, or 0.05 percent, to 6,325.06.
The dollar rose to a 10-day high against a basket of currencies. The dollar index, which tracks the greenback against six major rivals, was up 0.42 percent at 97.322.
The euro was down 0.24 percent to $1.1185 against the dollar, a day after the European Central Bank closed the door on more interest rate cuts.
Oil prices steadied after falling sharply earlier in the week on pressure from widespread evidence of a fuel glut despite efforts to curb supply led by the Organization of the Petroleum Exporting Countries.
Brent crude oil rose 47 cents to $48.33 a barrel, U.S. crude gained 40 cents to $46.04.
U.S. Treasury long-dated yields rose to one-week highs as investors consolidated positions ahead of next week's government debt auctions and a widely expected interest rate increase by the Fed.
U.S. 10-year Treasuries were last down 7/32 in price to yield 2.2198 percent.
Reporting by Herbert Lash; Editing by Nick Zieminski