GLOBAL MARKETS-Credit, recession fears haunt investors

(Updates with Wall Street outlook, state of credit markets, euro zone investor sentiment)

By Jeremy Gaunt, European Investment Correspondent

LONDON, March 10 (Reuters) - Recession fears following the biggest U.S. job losses in five years mixed with renewed strains in the credit market to depress stocks on Monday, although Wall Street looked set for a positive start after last week's losses.

European shares were flat, up from early losses. Japan's benchmark Nikkei index .N225 closed at a 2-1/2-year low.

The dollar was generally weaker and investors were seeking safety in government bonds.

"The real problem right now is the United States, with the final toll of the subprime crisis still unknown," said Katsuhiko Kodama, senior strategist at Toyo Securities Co. in Tokyo.

Worries that the world-leading U.S. economy is heading for or is already in recession were fuelled on Friday when the U.S. Labor Department said 63,000 non-farm jobs had been eliminated in February, in contrast to Wall Street economists' forecasts that 25,000 jobs would be added.

Investors have already been pricing in a decline in U.S. growth but are not clear how far the economy will fall or how much impact it will have on other economies.

Sentiment among euro zone investors, for example, deteriorated to the worst in more than 2-1/2 years this month.

The March index from a survey of 836 European investors by the Sentix research group fell to 0.4, the lowest level since July 2005 and a ninth consecutive decline. It was 4.3 in February.

At the same time, concerns have risen again over the health of the credit market. U.S. and European credit spreads have been widening.

The Federal Reserve announced a series of term repurchase operations on Friday totalling $200 billion to ease liquidity pressures, adding to a sense that the money markets are in poor shape.

Barclays Capital noted that liquidity in traditional European government bond markets has all but dried up.

"Markets are dysfunctional, positions are being liquidated as stop losses are being reached, and there are no players willing (or able) to take opposite positions at this stage," it said in a note.

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