Crude oil prices rose to 2-1/2 year highs on Monday on heightened worries about supply disruption due to deepening unrest in Libya, while Asian stocks slipped as concerns about the Middle East and higher energy prices weighed on equities.

Asian markets have see-sawed following volatile oil prices in recent weeks, but the MSCI ex-Japan index <.MIAP00000PUS> is barely a percent away from a 2-1/2 year peak tested in January, indicating markets have been largely resilient to the Libyan crisis.

Still, investors are worried that a prolonged period of high oil prices could stifle economic growth and erode corporate profits, while adding to inflationary pressures in emerging economies.

On Monday, the MSCI ex-Japan index was down more than half a percent.

U.S. crude oil futures jumped 1.6 percent, topping $106, to the highest price in 2-1/2 years on Monday as a counter-offensive by Libya's Muammar Gaddafi against rebels deepened concerns that a civil war is brewing in Africa's largest holder of oil reserves.

ICE Brent crude for April was trading at $117.28 a barrel, up 1.1 percent.

The concern is that with what we are seeing in Libya, it's purely fear driving the market, said Jonathan Barratt, managing director at Commodity Broking Services in Sydney.

Each time the price moves up a little, people are forced into the market. Once it's feeding itself, it will continue to rise, Barratt said, adding $120 may be the peak without further supply disruptions.

A reasonably strong batch of U.S. data on Friday that showed the jobless rate falling to a near two-year low failed to boost sentiment, as investors remained firmly focused on the developments in the Middle East and the resulting longer-term impact on oil.

U.S. crude is up by more than a fifth in the last two weeks.

The spike in oil combined with soaring food prices present fresh problems for central banks in Thailand, Malaysia, South Korea and New Zealand who head for policy meetings this week.

The region is a big importer of oil and market players are worried that sharp increases in prices would stifle growth and fuel inflationary pressures.

FAIRLY VALUED?

The MSCI APXJ index is trading at 12.7 times forward 12-month earnings, at par with its long-term average, I/B/E/S data showed -- indicating that markets are now fairly valued.

Higher oil prices are a key factor weighing on investor sentiment. Heavier energy costs have numerous negative implications for a manufacturing-focused energy importer like South Korea, said Y.S. Rhoo, a market analyst at Hyundai Securities.

Tokyo's Nikkei average <.N225>, Australia's S&P/ASX 200 index <.AXJO> and South Korea's KOSPI <.KS11> fell more than one percent each, tracking a weaker Wall Street close.

Wall Street erased most of its weekly gains on Friday, with the S&P 500 Index <.SPX> falling by 0.74 percent, as fears of more geopolitical turmoil overshadowed positive U.S. data. <.N>

The CBOE Volatility Index <.VIX>, Wall Street's fear gauge, rose slightly to 19.11 but stayed well below a May peak of 48.

Rising tensions in the Middle East also stoked demand for precious metals and government bonds.

Gold, often sought in times of geopolitical tensions, rose to near a lifetime high at $1,434.60 an ounce, while silver surged 3 percent to 31-year highs as investors piled into safe havens. Gold hit a record $1,440 last week.

Treasury debt prices stabilised after Friday's gains with benchmark ten year notes at 3.49 percent, a shade above a one-month low of 3.39 percent hit earlier this month.

In currencies, the dollar struggled against a basket of major currencies <.DXY> after failing to get a big boost from the U.S. data, while the euro was supported on expectations of an interest rate hike next month from a hawkish European Central Bank.

The kiwi dollar held above a one-year low versus the euro and a five-month low against the dollar but is set to stay pressured ahead of an expected interest rate cut this week.

(Additional reporting by Ian Chua in Sydney, Alejandro Barbajosa in Singapore and Antoni Slodkowski in Tokyo)

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