GLOBAL MARKETS-Stocks fall as virus cases rise; U.S. dollar edges higher

* U.S. stocks sharply lower in afternoon trading

* Gold prices rally

* U.S. bond prices fall (Updates with closing oil prices)

NEW YORK, Jan 4 (Reuters) - U.S. stocks dropped more than 1% on Monday, the first trading day of the new year, pulling back after recent gains to record highs, while the U.S. dollar was up slightly.

Stocks hit record highs early in the session as investors focused on the rollout of COVID-19 vaccines, but sentiment quickly turned cautious over the path of the virus, which continues to spread amid the discovery of a new variant.

The outcome of runoff elections on Tuesday in Georgia for two U.S. Senate seats added to the nervousness.

“Investors are feeling a bit nervous on the first trading day of the new year, and I think this is a confluence of factors,” said Lindsey Bell, chief investment strategist at Ally Invest, in Charlotte, North Carolina.

MSCI’s All-Country World Index, which tracks stocks across 49 countries, was down 0.7% after earlier hitting a record high.

The Dow Jones Industrial Average fell 492 points, or 1.61%, to 30,114.48, the S&P 500 lost 64.89 points, or 1.73%, to 3,691.18 and the Nasdaq Composite dropped 210.31 points, or 1.63%, to 12,677.98.

The pan-European STOXX 600 index rose 0.67%, while Britain’s FTSE 100 index closed up 1.7% on its first post-Brexit trading day.

Britain began vaccinating its population with the COVID-19 shot developed by Oxford University and AstraZeneca on Monday.

With the lag between a full vaccine rollout and a global economic recovery, investors will count on central banks to keep money cheap.

Minutes of the Federal Reserve’s Dec. 15-16 policy meeting are due on Wednesday and should offer more details on discussions about making the U.S. central bank’s forward policy guidance more explicit and the chance of a further increase in asset purchases this year.

Friday brings the U.S. employment report for December.

In currencies, the U.S. dollar recovered after falling to its lowest level since April 2018.

The dollar index rose 0.169%, with the euro up 0.88% to $1.2244.

The Japanese yen strengthened 0.08% versus the greenback to 103.12 per dollar, while Sterling was last trading at $1.3556, down 0.84% on the day.

Gold prices were up more than 2%, while U.S. crude futures fell 1.9% to settle at $47.62 a barrel and Brent futures dropped 1.4% to $51.09.

U.S. Treasury yields edged higher as traders repositioned at the start of trading in the new year. Benchmark 10-year Treasury notes last fell 1/32 in price to yield 0.9148%.