GLOBAL MARKETS-Dollar, gov't bond yields sink to new lows

* Dollar plunges to 13-1/2 year trough vs yen, below 88

* European, U.S. government debt touch fresh historic lows

* Morgan Stanley's, PNB Paribas' losses lead stocks lower

* Oil slips; OPEC's record cut doesn't offset demand slide (Recasts with U.S. markets, changes byline, dateline; previous LONDON)

By Herbert Lash

NEW YORK, Dec 17 (Reuters) - The dollar fell anew against the euro and yen while yields on U.S. and European government debt traded at or near historic lows on Wednesday, a day after the bold credit easing by the Federal Reserve to combat a worsening recession.

Oil prices dropped as much as $3 a barrel after dealers said a record supply cut by the Organization of Petroleum Exporting Countries would not be enough to counter slumping energy demand brought on by the global economic downturn.

Equity markets on either side of the Atlantic slid as the initial enthusiasm over the Fed's surprisingly aggressive interest rate cut on Tuesday gave way to weak financial results at key banks and European data reinforced a dismal outlook.

Despite yields already at historic lows, investors piled into debt. Short-term government bonds still offer a safe-haven for investors fearful that a deepening recession will lead to further losses in other assets.

The yield on 30-year U.S. government bonds US30YT=RR led a rally in the United States, touching a series of record lows to yield as little as 2.58 percent. Yields move in the opposite direction of bond prices.

"We are trading in no man's land and expect this will continue into year-end," said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.

The benchmark 10-year U.S. Treasury note US10YT=RR was up 36/32 in price to yield 2.14 percent.

Two-year German government bond yields hit their lowest level since the euro zone was created, with the two-year Schatz hitting 1.842 percent EU2YT=RR, according to Reuters data.

It was the lowest level since the rate-sensitive Schatz was launched in 1991.

The Fed's surprisedly large cut further eroded the U.S. currency's appeal against the euro, which has gained a staggering 11 percent so far during the month.

The dollar hit a fresh 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen, in a plunge that stoked speculation Japanese authorities may intervene to rein in its climb, which is hurting the nation's exporters.

"The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being," said Boris Schlossberg, director of currency research at GFT Forex in New York.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index .DXY off 1.48 percent at 79.011. Against the yen, the dollar JPY= fell 1.21 percent at 87.85.

The euro EUR= rose 1.65 percent at $1.4331.

U.S. and European stocks fell. Morgan Stanley (MS.N) shares slid after reporting a worse-than-expected $2.2 billion quarterly loss as the credit crisis caused more write-downs.

BNP Paribas (BNPP.PA) revealed an 11-month loss at its investment banking unit, hit by exposure to an alleged fraud by U.S. financier Bernard Madoff.

"Weaker company data are back in focus," said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Bonn, Germany.

"The news about BNP is the main trigger regarding European banks, while Morgan Stanley's results only seem to seem to have a marginal impact," he added.

Apple Inc (AAPL.O) was a major weight on the Nasdaq after the iPod maker said Chief Executive Steve Jobs will not deliver the keynote address at the Macworld trade show next month, reviving concern about his health.

Apple's shares tumbled about 7 percent.

Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey, said investors were initially enthused after the Fed's moves on Tuesday made it clear it would do whatever it takes to get the U.S. economy back on track.

"This morning we awaken with a hangover and the realization of how many bullets do they have left?" Arnuk said.

Before 1 p.m., the Dow Jones industrial average .DJI was off 41.50 points, or 0.47 percent, at 8,882.64. The Standard & Poor's 500 Index .SPX was down 3.55 points, or 0.39 percent, at 909.63. The Nasdaq Composite Index .IXIC was down 6.67 points, or 0.42 percent, at 1,583.22.

The FTSEurofirst 300 .FTEU3 index of top European shares closed down 0.76 percent at 828.53 points.

OPEC announced an agreement to cut 2.2 million barrels per day of output starting Jan. 1 -- the biggest single reduction on record -- adding to previous cuts of 2 million barrels since September.

U.S. light sweet crude oil CLc1 fell $2.36 percent to $41.24 a barrel.

Spot gold prices XAU= rose $8.00 to $864.70 an ounce.

Asian stocks rose overnight, supported by sectors sensitive to interest rates in anticipation regional policy-makers will take more aggressive steps to support growth after the Federal Reserve's easing on Tuesday.

The MSCI index of Asian-Pacific stocks outside Japan .MIAPJ0000PUS rose 2.3 percent to the highest since Nov. 11. But Japan's Nikkei share average .N225 shed early gains to end down 0.5 percent as the yen's strength walloped exporters. (Reporting by Leah Schnurr, Richard Valdmanis, Richard Leong, Wanfeng Zhou in New York; George Matlock in London and Christoph Steitz in Frankfurt; writing by Herbert Lash; Editing by Kenneth Barry)