Former Federal Reserve chairman, Alan Greenspan. - Reuters

NEW YORK, United States (Reuters):

Concerns about the health of the U.S. economy drove bonds higher and the dollar lower yesterday, while tension over Iran's nuclear ambitions kept oil above US$61 a barrel, crimping gains in U.S. stocks.

Investors were generally cautious ahead of a busy calendar of U.S. economic data releases this week and comments overnight from former Federal Reserve Chairman Alan Greenspan that the U.S. economy could fall into a recession later this year.

Safe-haven U.S. government bonds yesterday extended Friday's gains, pushed up in part by worries about one of the U.S. economy's main weak points: the housing sector.

Benchmark 10-year notes were trading up 7/32 in price for a yield of 4.64 per cent, down from 4.67 per cent late on Friday. Benchmark yields touched their lowest level since January 5.

"There is some follow-through buying from Friday, and the comments from Greenspan talking about a potential recession at the end of this year are having an impact," said Adam Brown, co-head of U.S. Treasury trading at Barclays Capital in New York.

IRAN NURCLEAR WORRIES

Risk aversion among investors ticked up, particularly because of mounting geopolitical tension over Iran's nuclear programme.

Western powers were meeting in London to discuss tightening U.N. sanctions on Iran, the world's fourth largest oil exporter, as tough talk on the Islamic Republic's nuclear programme rose from both sides.

President Mahmoud Ahmadinejad declared Iran had "no brake and no reverse gear," prompting U.S. Secretary of State Condoleezza Rice to say Tehran needed a 'stop button' for a programme the West fears is geared to producing nuclear arms.

The stand-off sent oil and gold prices higher they eased back a bit later.

In New York, oil futures for April delivery rose 18 cents to US$61.32 a barrel, while COMEX gold for April delivery rose $2.20 to US$688.90 an ounce, near a seven-month high of $691.90.

SOFT DOLLAR

Major U.S. stock indexes were mixed as sellers pointed to higher oil prices and Iran tensions, while buyers touted a proposed $31.8 billion purchase of Texas power company TXU Corp..

The Dow Jones industrial average was up 8.26 points, or 0.07 percent, at 12,655.74. The Standard & Poor's 500 Index was up 2.11 points, or 0.15 per cent, at 1,453.30. The Nasdaq Composite Index was down 7.83 points, or 0.31 percent, at 2,507.27.

"Oil is scaring people. It's raising inflation worries," said Adam Tracy, director of listed trading at Thomas Weisel Partners in San Francisco.

European shares were higher, helped by strong energy shares.The FTSEurofirst 300 index of top European shares was 0.41 percent higher at 1,550.05 points, near a six-year high of 1,552.59 points.

The dollar was steady against the euro but lower against the yen, with many investors sidelined ahead of data showing January orders for durable goods and a revised take on gross domestic product due later in the week.

The euro was at $1.3165, off an earlier two-month high of $1.3198. The dollar was also down 0.4 per cent at 120.55 yen.