Emerging Markets-Assets fall, Russia CDS at record high

* Emerging stocks at near-4-year lows

* Emerging debt spreads at widest in 6 years

* Russia 5-year credit default swaps in distressed territory

* Ukraine 5-yr CDS indicate 80 pct default probability

By Carolyn Cohn

LONDON, Oct 23 (Reuters) - Emerging stocks continued recent sharp falls, debt spreads gaped wider and Russia's credit default swaps indicated the sovereign qualified as distressed debt on Thursday as investors exited emerging markets.

Emerging markets have switched from being bystander in a U.S. sub-prime crisis to centre stage in a panic about global growth and the health of global financial institutions.

Cash-strapped Western banks are retrenching their positions in emerging markets, hedge funds are unwinding positions to cover redemptions and currency volatility is eroding the value of emerging market assets.

Falling commodity prices have hit commodity producers like Russia and Brazil, amid slowing growth prospects for economic powerhouse China.

Benchmark emerging equities .MSCIEF dropped 4 percent to their lowest in nearly four years, after falling nearly 8 percent on Wednesday.

"Equities in Europe are all down and with U.S. equity futures also turning negative, there could be more pressure on emerging currencies," said Lucy Bethell, emerging markets strategist at RBS.

Emerging sovereign debt spreads 11EMJ widened by 20 basis points to 822 bps over U.S. Treasuries, levels not seen since late 2002.

Sovereign debt spreads have widened by nearly 200 basis points this week alone, and by more than 500 basis points since early August, just before the outbreak of military conflict between Russia and Georgia.

Georgia said on Thursday Russia had deployed 2,000 additional troops in South Ossetia in the past week and was preparing "provocations" in the breakaway territory. [nLN513347]

DISTRESSED RUSSIA

The cost of insuring Russia's debt against restructuring or default rose to record highs in the five-year CDS market above 1,000 basis points, a level regarded as indicating the sovereign's debt is distressed.

Merrill Lynch recommended buying Russia's CDS, with a target at 1,500 bps.

"The medium-term outlook appears increasingly challenging, in view of the sharp decline in oil prices that is ultimately weighing on the external sector position," the bank said in a client note.

Five-year CDS for other sovereigns also hit record peaks. Ukraine's CDS were quoted at a mid-price of 2,800 basis points, Commerzbank said.

UniCredit, in a note entitled: "sell now, ask questions later", said Ukraine's CDS levels implied a default probability of 80 percent.

The Ukrainian hryvnia dropped over 3 percent to a record low of 6.0 to the dollar UAH=, despite four straight days of intervention by the central bank to defend the currency.

Kazakhstan's CDS moved deeper into distressed territory, at a mid-price of 1,300 bps, while Hungary widened by around 30 bps to 575.

Hungarian markets are shut for a holiday on Thursday and Friday, after the central bank only temporarily headed off a slide in the forint with a three-point rate hike on Wednesday, to 11.5 percent.

However, some currencies regained ground after sharp sell-offs in the previous session.

The rand rose 1.5 percent against the dollar ZAR= after dropping 8.5 percent on Wednesday, and the lira TRY= steadied after the central bank left the overnight borrowing rate unchanged at 16.75 percent.

One trade was recorded on the Reuters matching dealing system in the Icelandic crown, the first in nearly a week after markets froze following a banking collapse in Iceland.

The crown traded at 270 per euro EURISK=D3 late on Wednesday, compared with the day's fixing in the local market at 150.50 ICEX.

Iceland, along with Hungary, Ukraine and Belarus, is lining up aid from the International Monetary Fund. Pakistan said on Thursday it had not asked for an IMF facility, contrary to comments by the head of the multi-lateral agency.

The Latvian lat continued to trade at the bottom of its trading band against the euro EURLVL=.

The chief executive of Sweden's Swedbank (SWEDa.ST) said the situation in the Baltic region, which accounts for around 30 percent of its profits, was worse than the bank had foreseen six months ago. [nSAT005778]

(Additional reporting by Peter Apps; editing by Andy Bruce)