Global stocks dive as U.S. bonds jump

By Cal Mankowski

NEW YORK (Reuters) - Fears that tighter credit in the U.S. subprime housing sector will choke off growth in other sectors sent stock markets around the world sharply lower on Thursday while government bonds rallied in a flight to safety.

The yen soared against all of the major currencies as investors unwound risky trades financed with borrowed yen.

U.S. stocks opened sharply lower after weak housing data and then added to the losses following news that manufacturing activity in the U.S. mid-Atlantic region had no growth in August.

The Dow Jones industrial average, the S&P 500 and the Nasdaq composite index all fell to levels 10 percent below their mid-July highs, a decline that chart analysts consider a correction from excessive levels.

"It's fear and panic," said David Bianco, chief U.S. equity strategist at UBS, in New York. "People are beginning to lean toward outlooks now of all the dominoes falling, that the U.S. economy slides into recession because of this credit crunch, and it has an adverse impact on the global economy and even the globally exposed sectors."

Some of the losses were pared in late trading but going into the final hour of regular session trading the major indexes were still sharply lower.

At 2:59 p.m. the Dow Jones industrial average .DJI was down 164.21 points, or 1.28 percent, at 12,697.26. The Standard & Poor's 500 Index .SPX was down 13.11 points, or 0.93 percent, at 1,393.59 and the Nasdaq Composite Index

.IXIC was down 38.69 points, or 1.57 percent, at 2,420.14.

The Toronto Stock Exchange's main stock index .GSPTSE was down nearly 3 percent after paring some losses.

Benchmark 10-year Treasury notes US10YT=RR were up more than a full point, with the yield falling to 4.60 percent. Two-year note US2YT=RR yields briefly traded below 4 percent for the first time in nearly two years.

The rally in the yen saw the Japanese currency in its biggest one-day gain versus the dollar in almost nine years. Traders said investors were unwinding carry trades that are financed with the low-yielding yen.

The dollar fell about 3 percent to 112.89 yen,

On the New York Mercantile Exchange in early afternoon, September crude CLU7 was down $2.78, or 3.8 percent, at $70.55 a barrel. Traders said the decline was due to fears that a worldwide economic slowdown would stifle demand.

Even precious metals were not immune from the worldwide sell-off. Spot gold XAU= fell 2.5 percent to a five-week low.

Worries that the effects of the U.S. subprime crisis would be felt worldwide undermined global stock markets.