CORRECTED - GLOBAL MARKETS-Investors flee stocks for bonds on US downgrade

(CORRECTS to show volume highest since day after "flash
crash")

* World stocks hit by losses, Wall St down 6 pct

* Worst day for S&P 500 since December 2008

* Gold hits record above $1,700 an ounce

* Italian, Spanish bond yields drop on ECB buying
(Adds details, quote)

By Leah Schnurr

NEW YORK, Aug 8 (Reuters) - U.S. stocks plunged on Monday,
racking up their biggest losses in almost three years as
investors fled to the safety of gold and bonds after the
downgrade of the U.S. credit rating by Standard & Poor's stoked
fears the country is powerless to stop another recession.

Wall Street ended down more than 6 percent while European
stocks hit a two-year low as investors saw no solution to the
twin debt crises on both sides of the Atlantic.

A favored gauge of investor anxiety spiked to its biggest
one-day gain since February 2007, a sign investors are afraid
of more declines to come. The CBOE Volatility Index .VIX
surged 50 percent to end at 48.

The selling came in heavy trading, with volume of 17.5
billion shares on the New York Stock Exchange, NYSE Amex and
Nasdaq, the busiest since the day after last year's "flash
crash."

Ironically, investors took shelter in the one asset that
was directly affected by the downgrade -- U.S. government
bonds. Benchmark 10-year Treasury notes, held widely for their
perceived high quality, rallied, the yield dropping to 2.32
percent.

Investors struggled to discern the effects of the U.S.
credit rating downgrade to AA-plus from AAA, which could hit
various components of the vast U.S. financial sector, from
mortgage lenders to municipal issuers and insurers.

"It is a panic, and almost by definition it doesn't have an
issue. It wouldn't matter what it was," said James Paulsen,
chief investment strategist at Wells Capital Management, with
over $340 billion in assets under management.

The downgrade -- and threats of subsequent moves by S&P or
other rating agencies -- adds to concern about the credibility
of the United States as the leader in the global economy, as
well as the dollar's position as the world's reserve currency.

Central to S&P's argument was that political paralysis in
Washington has reached a point where the government would be
unable to deal with worsening deficits and sagging economic
growth. This burdens a stock market already skittish after last
week's outbreak of fear.

"In many ways this is not about the downgrade. I think it's
about the underlying fundamentals and issues that are embodied
in the downgrade itself," said Jonathan Golub, chief U.S.
equity strategist at UBS in New York.

This was underlined when selling accelerated during
comments from U.S. President Barack Obama, after he blamed the
downgrade on political gridlock in Washington. He said he would
offer more recommendations on how to reduce federal deficits,
but detailed no new proposals.For details, see [ID:nN1E7771BR]

"Almost universally my clients are blaming this on the
government, this lack of confidence -- and that is what this
is," said William Suplee, a certified financial planner at
Structured Asset Management in Paoli, Pennsylvania, who said he
had received several calls from clients on Monday.

"This sell-off is uniformly blamed by my clients on the
government's inability to act rationally."

MSCI's all-country world stock index dropped 5.1 percent to
its lowest level since September 2010.

Monday's global stock market sell-off wiped out more than
$1.35 trillion in investor wealth worldwide, according to the
5.2 percent drop in the MSCI World Index .MIWD00000PUS. The
index entered the week with a value of $26.42 trillion.

Monday's rush for the exits extinguished any relief from
news the European Central Bank was buying Italian and Spanish
government bonds in the latest move to staunch the euro zone
debt crisis.[ID:nLDE7770NM]

SEARCH FOR SAFETY

Several major brokerages have in recent days lowered their
expectations for U.S. economic growth and share appreciation
for 2011 and 2012.

Moody's repeated a warning it could downgrade the United
States before 2013 if the fiscal or economic outlook weakened
significantly. It said it saw the potential for a new deal in
Washington to cut the budget deficit before then.

The Dow Jones industrial average .DJI dropped 634.76
points, or 5.55 percent, to 10,809.85. The Standard & Poor's
500 Index.SPX slumped 79.92 points, or 6.66 percent, to
1,119.46. The Nasdaq Composite Index.IXIC skidded 174.72
points, or 6.90 percent, to 2,357.69.

The S&P 500 lost $729.3 billion in value with its drop of
6.66 percent, the biggest since December 2008.

Investors looking for a place to park their money pushed
into gold, U.S. Treasuries and some safe-haven currencies.

Gold XAU= ran up to a record high above $1,700 an ounce.
Benchmark 10-year notesUS10YT=RR at one point soared over two
points in price, with yields falling as low as 2.33 percent,
the lowest level since February 2009.

"Treasuries are still a comparatively low-risk asset. I
think there's no doubt about that," said Michael Schumacher, a
strategist at UBS in Stamford, Connecticut.

The euro slumped to a record low of 1.0640 Swiss francs
EURCHF=EBS and last traded down 2.3 percent at 1.07220. It
also lost 2 percent versus the yenEURJPY=R.

The dollarJPY=EBS fell 0.9 percent to 77.68 yen, having
slipped to around 77.45 on EBS. It was down 1.5 percent at
0.7557 Swiss francCHF=EBS, after falling to 0.7480 earlier,
also a record low.

European shares closed down 4 percent after registering
gains on the ECB action. The FTSEurofirst 300 index .FTEU3
has lost about 21 percent since a peak in mid-February, putting
it in bear market territory.
(Additional reporting by Daniel Bases, Lauren Young and Edward
Krudy in New York and Atul Prakash and Jeremy Gaunt in London;
Editing by Dan Grebler)