GLOBAL MARKETS-Oil slumps on report Saudis do not expect deal; stocks dip

* World stocks dip but still up for week

* U.S. bond yields hover near 2-weeks lows

* U.S. stocks down, dragged down by energy shares (Updates with drop in oil prices, adds European shares' close)

By Caroline Valetkevitch

NEW YORK, Sept 23 (Reuters) - Oil prices fell sharply on Friday following a report that Saudi Arabia did not expect a deal at talks by major crude exporters next week aimed at freezing output and reining in a global glut, while world stock indexes edged lower.

Traders cited a Bloomberg report that Saudi Arabia did not expect a decision at Algiers, where the biggest oil producers are expected to convene next week.

Brent crude oil shed 3.1 percent to $46.17 a barrel, while U.S. crude slumped 3.6 percent to $44.67, both paring strong weekly gains.

Concern about global oversupply has depressed oil prices since mid-2014.

Energy shares led declines in U.S. stocks, with the S&P energy index falling 1.2 percent.

The decline in world stock indexes came as investors locked in gains from earlier this week fueled by optimism that the U.S. Federal Reserve will hold off from raising interest rates in the near term.

"The (equity) market is taking a bit of a breather after a strong week," said Mike Bailey, director of research at FBB Capital Partner, in Bethesda, Maryland.

"Investors are saying markets are already expensive and they've become more expensive this week, so this is a bit of a reversal."

The Dow Jones industrial average was down 73.11 points, or 0.4 percent, at 18,319.35, the S&P 500 lost 7.2 points, or 0.33 percent, to 2,169.98 and the Nasdaq Composite dropped 16.73 points, or 0.31 percent, to 5,322.79.

MSCI (Frankfurt: 3HM.F - news) 's all-country world stock index shed 0.5 percent but was on track for its biggest weekly gain since mid-July. Europe's STOXX 600 closed down 0.7 percent.

U.S. Treasury yields were little changed, with benchmark U.S. yields hovering near two-week lows as traders moved to the sidelines following a recent bond market rally.

U.S. benchmark 10-year Treasury notes were up 1/32 in price for a yield of 1.627 percent, down 0.5 basis point from Thursday. Earlier on Friday, it touched 1.606 percent, its lowest since Sept. 9, Reuters data showed.

In the foreign exchange market, the dollar index was mostly flat. Boston Fed President Eric Rosengren's comments that he believed U.S. short-term interest rates should be raised now provided some support, but the index was near unchanged at 95.437.

The dollar index was on track for its worst week in a month. (Additional reporting by Tanya Agrawal, Barani Krishnan; and Rania El Gamal and Dmitry Zhdannikov in London; Editing by Bernadette Baum)