* Crash of Malaysian airliner sparks risk-aversion * Russian assets fall on U.S., EU sanctions * U.S. housing starts weak; Morgan Stanley results up (Updates to the close of U.S. trading, adds Gaza offensive) By Ryan Vlastelica NEW YORK, July 17 (Reuters) - Geopolitical tensions weighed heavily on global stock markets on Thursday, with indexes extending their declines in afternoon trading while safe-haven assets rose.
Wall Street stocks started the day with modest losses after the United States announced new sanctions against Russia in response to recent unrest in Ukraine. Subsequently, a Malaysian airlines jet was downed over eastern Ukraine near the Russian border, sparking a further fall in risk assets on concerns that the conflict might widen.
About 300 people died in the crash, caused by a missile fired at the plane, according to a Ukrainian official. The incident was the latest in a series of tensions between Ukraine and Russia that has resulted in clashes along the border, including the targeting of military aircraft.
Even wider equity losses came in the last hour of trading after Israeli Prime Minister Benjamin Netanyahu instructed the military to begin a ground offensive in Gaza.
"I can't remember a time when there were more geopolitical skirmishes going on, all of which are creating uncertainty," said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston, who said the market was "trading on eggshells." The S&P 500 posted its biggest one-day percentage decline since April 10, while the CBOE Volatility index spiked 32 percent in its biggest one-day jump since April 2013. Despite the move, the VIX, at 14.54, remains low by historical standards.
The Dow Jones industrial average fell 161.39 points, or 0.94 percent, to 16,976.81, the S&P 500 lost 23.45 points, or 1.18 percent, to 1,958.12 and the Nasdaq Composite dropped 62.52 points, or 1.41 percent, to 4,363.45.
All 10 primary S&P 500 sectors ended the day with solid losses, but airlines were especially hard hit, with the NYSE Arca Airline Index down 2.6 percent.
The aircraft incident sparked a shift to safe-haven assets like U.S. government bonds. The benchmark U.S. 10-year Treasury note rose 22/32 in price, dropping the yield to 2.4584 percent, not far from the 2014 low of 2.438 percent. Still, some said the market impact of the crash would be short-lived.
"For a sustained sub-2.50 percent on the 10-year yield, we need another catalyst to support the idea the economy is not as strong as some people think," said Anthony Valeri, fixed income strategist at LPL Financial in San Diego.
Gold prices jumped 1.5 percent in their biggest one-day advance in about a month. Silver prices rose 2.2 percent.
The Russian rouble fell 1.8 percent against the U.S. dollar, its biggest one-day decline since June 2013. Major European stock indexes fell just before the close of trading. Moscow's MICEX stock market fell 2.3 percent and its dollar-traded related index, the RTS index, dropped 3.8 percent.
In the currency market, the Japanese yen rose 0.5 percent against the dollar, while the Swiss franc was little changed and the U.S. dollar was almost flat against a basket of currencies.
European shares ended near their lows of the day. The pan-European FTSEurofirst 300 lost 1.0 percent and the MSCI International ACWI Price Index lost 0.9 percent.
U.S. crude oil futures rose $1.90, or 2 percent, to $103.10 per barrel. Brent gained 0.6 percent to $107.80.
Prior to the report of the downed plane, Wall Street stocks edged lower on a weak reading on U.S. housing starts, which fell well short of expectations in June.
Investment bank Morgan Stanley reported results that topped expectations, but the stock pared its early advance to close down 0.6 percent.
(Reporting by Ryan Vlastelica; Editing by Clive McKeef and Dan Grebler)
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