* European shares dip, banks in focus after stress tests
* MSCI Global stock index hits highest since mid-August, 2015
* U.S. crude breaks below $40 as oil ends down 4 pct on glut
* U.S. dollar recoups losses after worst week in 3 months (Updates with U.S. afternoon trading)
By Saqib Iqbal Ahmed
NEW YORK, Aug 1 (Reuters) - Oil prices tumbled on Monday on heightened worries of an oil glut, putting pressure on energy shares and giving pause to global equity prices, which have rallied to their highest in nearly a year.
The U.S. dollar recovered some ground against a basket of major currencies after its worst week in three months. 15-percent slump in U.S. crude prices in July, the worst monthly loss in a year, triggered liquidation as trading began for August and U.S. crude fell below $40 per barrel for the first time since April. stop-loss technical selling combined with sheer liquidation by those fearing we'll soon be swimming in oil again," said Phil Davis, trader at PSW Investments in San Diego, California.
Brent crude LCOc1 settled down $1.39, or 3.19 percent, at $42.14 a barrel, while U.S. crude CLc1 settled down $1.54, or 3.70 percent, at $40.06.
Lower oil prices hit energy shares and global equity prices pulled back a little after rising to the highest in nearly a year. MSCI's world stocks index .MIWD00000PUS , which tracks shares in 45 nations, was down 0.14 percent.
On Wall Street, the S&P 500 .SPX and the Dow fell slightly as energy stocks weighed. The S&P, which earlier in the session hit an intraday all-time high, has been on a record-setting rally - helped by mostly positive data and strong earnings.
"I think the interesting thing is that you are not seeing a huge reaction out of the stocks side of the equation," said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle.
"You are seeing much more of a reaction out of distressed companies in the energy space than you are out of the broader equities."
The S&P 500 index has remained in a very tight range over the past 13 sessions and has struggled for direction.
"The economic data until last week had been pretty decent. But since the (U.S.) GDP numbers came out, we're seeing holes in the argument that the second half of the year is going to be better," said Art Hogan, chief market strategist at Wunderlich Securities in New York.
"At these valuations, the market is desperate for a catalyst to move higher."
Growth in U.S. gross domestic product in the second quarter came in below expectations on Friday, fuelling speculation that the Federal Reserve may not pull the trigger on raising interest rates anytime soon.
Data on Monday showed U.S. manufacturing activity slowed in July as orders fell broadly and construction spending dropped in June. Dow Jones industrial average .DJI fell 34.27 points, or 0.19 percent, to 18,397.97, the S&P 500 .SPX lost 3.17 points, or 0.15 percent, to 2,170.43 and the Nasdaq Composite .IXIC added 21.62 points, or 0.42 percent, to 5,183.75.
Europe's broad FTSEurofirst 300 index .FTEU3 closed down 0.61 percent at 1,339.15. Stocks were dragged down by banks such as UniCredit and Raiffeisen, which performed poorly in a Europe-wide stress tests. currency trading, the dollar index .DXY rebounded, helped by gains against the yen, which pulled back from three-week highs reached on Friday after the Bank of Japan eased policy less aggressively than expected. dollar index, which tracks the greenback against six major currencies, was up 0.23 percent to 95.746.
In bond markets, U.S. Treasury yields rose from Friday's multi-week lows on anticipation of a corporate bond offering from Microsoft MSFT.O , with profit-taking also fueling the move. 10-year Treasuries prices US10YT=RR were last down 11/32 to yield 1.4957 percent, after touching a more than two-week low yield of 1.450 percent on Friday.
Spot gold prices XAU= were up 0.17 percent to $1,352.86 an ounce.