GLOBAL MARKETS-Euro slumps as ECB moves boost dollar, equities

Thu Sep 4, 2014 3:25pm EDT

* ECB shocks with further cuts to main interest rates

* European stock index at highest since 2008

* Euro dips under $1.30 in biggest fall since 2011

* Dollar index up more than 1 percent (Adds latest prices, details)

By Michael Connor

NEW YORK, Sept 4 (Reuters) - 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.

The move gave the euro, used by 18 nations, its biggest single-day drop since 2011, while lifting stock prices in Europe and the United States to new highs and boosting the dollar.

Faced with signs of further deterioration in the euro zone economy, the ECB cut 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.

The euro hit a 14-month low against the dollar at $1.2921, breaking below the key technical resistance point of $1.30.

Although the euro later pared losses to trade at $1.2944, it was still off 1.55 percent in what was the currency's biggest one-day percentage decline since Nov. 8, 2011.

An 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 before pulling back.

"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 closing up 1.1 percent to 1,400.99.

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

Both the Dow and S&P 500 touched record intraday highs after the ECB's surprise move but later eased.

The Dow Jones industrial average was last down 37.37 points, or 0.22 percent, at 17,040.91. The Standard & Poor's 500 Index was down 6.83 points, or 0.34 percent, at 1,993.89. The Nasdaq Composite Index was down 15.17 points, or 0.33 percent, at 4,557.40.

The dollar index, which measures the greenback against six major currencies, touched a 2014 high of 83.865, the biggest percentage gain since July 5, 2013. The index was last up 1.1 percent.

The stronger dollar pushed oil prices lower. U.S. crude for October delivery fell $1.09 to settle at $94.45 a barrel, while Brent fell 94 cents to settle at $101.83 a barrel.

Benchmark 10-year U.S. Treasuries traded down 11/32 of a point in price, lifting the yield to 2.448 percent.

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

But the jury is still very much out on when the Fed can raise interest rates. (Reporting by Michael Connor in New York; Editing by Chizu Nomiyama, Leslie Adler and Dan Grebler)