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GLOBAL MARKETS -New COVID-19 strain inflicts pain across markets, triggers volatility

* European shares, S&P 500 futures down

* New coronavirus strain shuts much of UK, overshadows U.S. stimulus

* Pound hit, Brexit talks drag on with no deal

* Oil, copper prices slide; dollar higher

LONDON, Dec 21 (Reuters) - European shares fell 3% on Monday, the dollar strengthened and volatility surged across asset classes as a fast-spreading new coronavirus strain in Britain threatened to torpedo markets’ optimism over a vaccine-fuelled rebound in economic growth.

Wall Street was tipped to open sharply lower.

The strain, said to be up to 70% more transmissible than the original, has put some 16 million Britons under tougher lockdowns and prompted several countries to shut their borders to the UK, effectively overshadowing positive U.S. news on a much-needed stimulus bill.

The shutdown of international travel and the flow of freight in and out of Britain threatens chaos for British households and businesses.

Coinciding with the lack of a post-Brexit trade deal ahead of the Dec. 31 deadline, it sent the pound 2.5% lower below $1.32 putting it on track for its biggest daily fall since March.

Losses of more than 3% on UK equities were led by bigger tumbles at UK banks Lloyds and Barclays which were both down more than 6% at one stage.

European equities fell around 3%, travel and leisure stocks lost around 5% .

“Our main concern for the next few months in Europe would be that the UK (COVID-19) variant is already out of control on the continent, which would add to the pressure on the healthcare systems, forcing even stricter lockdowns at a growing economic cost,” Gilles Moëc, chief economist at AXA Investment Managers, told clients.

The market losses triggered across-the-board increases in volatility, a measure of price swings on an asset class, with Wall Street’s “fear gauge” the VIX up almost 40% on the day at the highest since early November.

Currency volatility jumped as well, with overnight sterling volatility approaching nine-month highs

Futures for the S&P 500 fell 2.5% while Nasdaq futures were down almost 1%, having opened firmer when U.S. Senate majority leader Mitch McConnell confirmed congressional leaders had agreed a roughly $900 billion COVID-19 relief bill.

While safe-haven assets such as German and U.S. government bonds rallied, gold, which usually rises during times of turmoil, reversed earlier gains to fall 0.6% to $1,868.

Its weakness on a day of a big equity selloff will rekindle memories of the market slump of March when investors sold assets en masse in a rush for the dollar.

DOLLAR TIME

Speculators’ dollar positioning remains broadly bearish, meaning many might rush to cover those short trades.

The dollar index rose as high as 90.8, up more than half a percent and well off last week’s 89.723 level that marked the lowest since April 2018.

The euro fell 1% at $1.216 while the yen lost half a percent at 103.8 per dollar.

U.S. and German bond yields slipped, with 10-year U.S. yields down six basis points. British two-year borrowing costs hit record lows

The U.S. two-year/10-year Treasury yield curve, another gauge of growth expectations, flattened a touch. It had risen to its steepest level in almost three years on Friday amid optimism about the stimulus bill..

The turmoil may also upend bullish bets on commodities such as oil and copper which were expected to benefit from a growth upswing next year.

Brent crude futures dropped more than 3% while copper, a key economic growth barometer, fell off the $8000-per-tonne mark it recently scaled for the first time since 2013 .

“The message is clear: oil prices are still very much and will continue to be at the mercy of the pandemic,” said Stephen Brennock of oil broker PVM.

Reporting by Sujata Rao; additional reporting by Wayne Cole in Sydney, Editing by William Maclean

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