GLOBAL MARKETS-Stocks, dollar rise as ECB moves take toll on euro

Thu Sep 4, 2014 11:59am EDT

* ECB shocks with further cuts to all main interest rates

* European stock index at highest since 2008

* Euro dips under $1.30 for first time in 14 months

* Dollar index up 1 percent (Adds latest prices, quotes)

By Michael Connor

NEW YORK, Sept 4 (Reuters) - Stock markets rose and the euro sank on Thursday after the European Central Bank unexpectedly cut ultra-low interest rates even further and said it would start buying loans and bonds next month to prop up the continent's struggling economy.

Faced with signs of further deterioration in the euro zone's economic prospects, the ECB cut major interest rates that were already at record lows by another 10 basis points, putting its deposit rate further into negative territory.

The euro zone economy flatlined in the second quarter, and the Ukraine crisis is weighing heavily on business confidence.

A benchmark index of European shares jumped more than 1 percent to its highest level since 2008, and on Wall Street both the Dow and the S&P 500 touched record highs.

The euro sank to a 14-month low against the dollar, hitting $1.2957 and breaking below the key technical resistance point of $1.30. Although the euro later pared losses to trade at $1.2971, it was still off 1.4 percent.

"The fact that the ECB is taking aggressive action to tackle its own maladies is likely to help risk markets in the U.S. such as equities and hurt bond markets," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.

ECB President Mario Draghi told reporters the bank would buy broad portfolios of simple and transparent asset-backed securities and of euro-denominated covered bonds from October.

The ECB also cut its main refinancing rate to 0.05 percent from 0.15 percent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20 percent to park funds with it.

Spanish, French and Portuguese stocks all gained over a full percentage point , while Germany's DAX rose 1 percent. The FTSEurofirst 300 index of top European shares hit its highest level since early 2008, at 1,403.63 points, before provisionally closing up 1.1 percent to 1,401.07.

Wall Street equities were also supported by U.S. economic data that showed continuing improvement in the world's largest economy. U.S. government bond prices fell.

The Dow Jones industrial average rose 63.77 points, or 0.37 percent, to 17,142.05, the S&P 500 gained 9.42 points, or 0.47 percent, to 2,010.14, and the Nasdaq Composite added 27.09 points, or 0.59 percent, to 4,599.65.

"The market likes what it heard," said Ken Polcari, director of the NYSE floor division at O'Neil Securities in New York.

The dollar index, which measures the greenback against six major currencies, was up nearly 1 percent to a peak for 2014 of 83.6767.

Benchmark 10-year U.S. Treasuries traded down 10/32 of a point in price, lifting the yield to 2.448 percent. The 30-year Treasury was off 28/32 in price, pushing the yield up to 3.202 percent

The Federal Reserve is on the verge of halting its own program of bond-buying, encouraged by a steady stream of encouraging signs on jobs and growth in the United States.

But the jury is still very much out on when the Fed can raise interest rates. The ADP jobs report on Thursday showed private payroll growth of 204,000 for August, a bit less than forecast by economists, but in line with expectations for Friday's U.S. broader jobs data out of the Labor Department. Economists are expecting payroll growth of 225,000 jobs.

(Reporting by Michael Connor in New York; Editing by Chizu Nomiyama and Leslie Adler)