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GLOBAL MARKETS-Oil rises on Qatar rift, sterling steadies after London attack

* Oil rises after some Arab states cut ties with Qatar

* Sterling recovers after fall on London attack, focus on election

* European shares dip, some markets shut for holiday

* Thursday's ECB meeting keeps lid on euro zone bond yields

* Gold hits six-week high after Friday's U.S. jobs report

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, June 5 (Reuters) - Oil rose 1 percent before paring gains on Monday after a diplomatic rift involving some of the Arab world's major energy producers, while sterling weakened only marginally following a deadly attack in London days before a parliamentary election.

The dollar lifted off seven-month lows hit on Friday in reaction to a weaker-than-forecast U.S. jobs report as U.S. Treasury yields rose and markets signalled they expected the Federal Reserve to raise interest rates next week.

European shares were marginally lower, failing to build on momentum from Asia, with some markets closed for a holiday.

In the Middle East, Qatar's main stock index fell more than 7 percent after Saudi Arabia - the world's biggest crude oil exporter - the United Arab Emirates, Egypt and Bahrain cut ties with Qatar, accusing the Gulf Arab state of supporting terrorism.

The move escalated a dispute over Qatar's support for the Muslim Brotherhood, the world's oldest Islamist movement.

Dubai stocks fell 1.7 percent and the main Saudi index dropped 0.8 percent.

Qatar is the world's biggest supplier of liquefied natural gas (LNG) and a major supplier of condensate.

Brent crude oil, the international benchmark, rose more than 1 percent at one point, recouping some of last week's 4 percent loses, before paring gains. It stood at $50.29 a barrel, up 0.7 percent on the day at 0836 GMT.

"There is not much geopolitical risk premium priced into oil right now, (but) if tensions do ratchet higher between the key OPEC producers, like Saudi Arabia, Iran and Iraq, then the market will start paying attention to this," said Virendra Chauhan, an oil analyst at consultants Energy Aspects.

Britain's pound fell half a cent against the dollar after the third militant attack in Britain in less than three months but recovered to trade down just 0.1 percent at $1.2875.

The modest reaction - the FTSE 100 stock index was down 0.2 percent, in line with the pan-European STOXX 600 index - follows the pattern after attacks in other European cities in recent months.

Prime Minister Theresa May said Thursday's election would go ahead. Opinion polls in the past week have put her Conservatives ahead, though with a narrowing lead over the Labour opposition.

"Regardless of this weeks outcome of UK elections, we believe the pound should prove a sell on rallies. This is especially true as investors focus will swiftly shift to actual Brexit negotiations later this month," Credit Agricole strategists wrote in a note to clients.

The dollar index, which measures the greenback against a currency basket, rose 0.1 percent, having hit its lowest since Nov. 9 after Friday's report showing the U.S. economy added fewer jobs than expected last month. Unemployment, however, fell to a 16-year low of 4.3 percent.

U.S. 10-year Treasury yields, which fell on Friday, were up 1.4 basis points at 2.173 percent.

Markets see a 94.7 percent chance of the Federal Reserve raising interest rates at its June 13-14 meeting, though a Reuters poll on Friday showed top U.S. banks split about when the central bank hikes rates after that.

The euro dipped 0.1 percent to $1.1267 and the yen was down a similar amount at 110.52.

ECB

European Central Bank policymakers meet this week. They are expected to take a more benign view of the euro zone economy and discuss dropping pledges to ramp up economic stimulus if needed, sources with direct knowledge of the discussions told Reuters last week.

Germany's benchmark 10-year bond or yield traded 1.6 basis points higher on Monday at 0.29 percent, close to one-month lows hit last week.

"The data, especially the inflation numbers, have not been strong enough to suggest a hawkish tone from the ECB this week," said Credit Agricole European fixed income strategist Orlando Green. "They are likely to leave things as balanced as possible."

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.1 percent. Japan's Nikkei closed down less than 0.1 percent.

Gold hit a six-week high of $1,282 an ounce, with traders citing the U.S. jobs report and reduced prospects of aggressive Fed rate increases.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/urlhttp://emea1.apps.cp.extranet.thomsonreuters.biz / c m s / ? p a g e I d = l i v e m a r k e t s

(Additional reporting by Nichola Saminather in SINGAPORE; Editing by Janet Lawrence)