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LONDON, Aug 7 (Reuters) Stocks fell on Monday as an oilfield shutdown in Alaska pushed crude above $77 a barrel, while caution about a slowing U.S. economy offset relief that the Federal Reserve may decide not to hike rates this week.

The dollar hovered near a two-month low on expectations that Friday's weak U.S. employment data will convince the Fed to keep interest rates on hold at 5.25 percent on Tuesday after 17 straight increases.

Government bonds were steady, with yields holding close to the six-week lows they hit in the wake of the non-farm payrolls data, which showed just 113,000 new jobs were added in July.

But stocks in Japan racked up their biggest one-day fall in almost three weeks and pan-European indexes were down more than 1 percent in early trade, giving up gains made in the aftermath of the data.

''The markets have wanted to see bad news for a while,'' John Haynes, a strategist at Rensburg Sheppards, said of the jobs numbers.

''But when you start to see bad news you wonder whether it will be more than you wished for, whether the medicine will taste quite as sweet as you'd hoped.'' The chance of a hard landing in the U.S. economy had increased slightly but remained an unlikely scenario, Haynes added.

''The corporate environment is sufficiently forgiving that people are making decent profits...we're talking about whether (companies) are going to grow their profits 8 percent or 10 percent, not whether they are going to grow their profits at all next year.'' OIL UP By 0931 GMT, the pan-European FTSEurofirst 300 index was 1.1 percent lower at 1,330.5 points, while the Nikkei average ended down 2.2 percent at 15,154 points.

The spike in oil prices also weighed on stock markets, as London Brent crude oil jumped more than 2 percent to a peak of $77.73 a barrel.

Oil producer BP Plc began shutting down its Prudhoe Bay oil field in Alaska, cutting production by 400,000 barrels per day (bpd), or 8 percent of U.S. domestic oil output.

BP shares led declines in Europe, falling 2 percent.

''The BP field is a sizable stream ... The world is already concerned about supplies and this is just adding to concerns,'' said Tony Nunan, a risk manager at Mitsubishi Corp. in Tokyo.

Other commodity prices also rose, with copper briefly spiking above $8,000 a tonne, boosted by the possibility of a strike at the world's largest copper mine, Escondida in Chile.

Gold prices also rose, hitting $650 an ounce, buoyed by the firmer oil price and weakness in the dollar.

DOLLAR EYES FED The dollar hovered at two-month lows and bonds continued to rally in cautious trade ahead of the U.S. Federal Reserve's Tuesday meeting.

Against a basket of currencies, the dollar was trading at 84.63, having sunk to its lowest since early June on Friday after the U.S.

jobs report.

Given the hefty dollar sell-off, there was the chance it could rebound strongly, particularly if the Fed caught markets by surprise.

''Tomorrow the Fed is going to leave rates unchanged, that is the market view, but there is still a 20 percent probability priced in the futures that there might be a hike,'' said Hans-Guenter Redeker, chief FX strategist at BNP Paribas.

''We have seen after the payrolls that some more aggressive euro long positions have been built up. That means those positions might be due to be taken profit on.'' The euro was steady at $1.2873 after surging to a two-month high of around $1.2909 on Friday, while the dollar was trading at 114.76 yen.

Government bonds remained in favour after their post-payrolls surge but were expected to trade in a narrow band before the Fed announcement, due around 1815 GMT on Tuesday.

The 10-year Bund yield was steady at 3.908 percent, while the September Bund future was off four ticks at 116.89.

REUTERS SBA RN2125