UPDATE 2-Australia's CBA, Westpac cut fixed mortgage rates
* Moves fuel speculation for Reserve Bank rate cut
* Aussie dollar knocked lower
* Market prices 160 bps of RBA cuts over 12 months (Adds Westpac rate cut, analyst's comment)
SYDNEY, Aug 9 (Reuters) - Australia's two biggest home lenders cut interest rates on fixed mortgages on Tuesday, fuelling market expectations of an official rate cut to counter the gloom on world markets and knocking the local currency lower.
Commonwealth Bank of Australia (CBA) , the nation's biggest home lender, slashed its fixed mortgage rate by up to 60 basis points and rival Westpac trimmed its three-year fixed mortgage rate by 20 basis points.
The two banks, which control more than 40 percent of Australian home lending, made their move against the backdrop of sliding share markets and fears of a double-dip U.S. recession and another global economic slowdown.
The CBA's announcement, which preceded Westpac, knocked almost half a cent off the already-battered Australian dollar , reinforcing market assumptions that the Australian central bank would be forced to abandon its tightening bias and instead opt for a near-term rate cut to support the economy.
"The banks are responding to the fall in long-term interest rates as the yield curve has inverted after expectations of an interest rate rise gave way to a cut," said banking analyst John Buonaccorsi, of RBS Equities.
"The other banks might well follow but that doesn't mean they will cut their variable rate just yet. The fixed rate market is small , probably under 10 percent."
The vast majority of domestic banks' home-loan assets are on variable rates, which are finely tuned to the overnight cash rate targeted by the Reserve Bank of Australia. Banks seldom adjust variable rates ahead of any change in the cash rate.
Over the next 12 months, the money market is pricing in almost 160 basis points of cuts to the 4.75 percent cash rate.
Australia, a major exporter of minerals and farm grains, is geared heavily to China, the world's fastest growing major economy. Its fortunes are also tied to commodity prices, many of which have slumped along with world share markets this week.
CBA, which faces stiff competition from local rivals, especially National Australia Bank , said its new fixed rates for loans from one to 5 years would now range from 6.59 to 6.99 percent.
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