Money markets, stocks stressed as bailout stalls

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Washington's failure to agree a bailout plan for the U.S. shattered banking system sent global stocks sharply lower on Friday and weakened the dollar, while the crisis put money markets under massive stress.

Government bond yields fell as investors sought safe havens.

"It's all about ongoing concerns about the banking crisis and where it's going to end," said Padhraic Garvey, head of investment grade strategy at ING in Amsterdam.

European shares were down around 1.3 percent and Japanese stocks lost around 1 percent after negotiations over the White House's unprecedented $700 billion bailout scheme degenerated into chaos overnight.

U.S. authorities also shut down Washington Mutual, the largest U.S. savings and loan bank, and sold its banking assets to JPMorgan Chase & Co for $1.9 billion.

In Europe, the spotlight fell on Fortis as shares in the Belgian-Dutch financial services group fell for a fifth straight day. The bank underlined its solid position and said customer moves have remained limited.

Underlying the drying up of finance that lies behind the crisis, three-month dollar interbank rates -- which include the seasonally illiquid Christmas period -- were indicated at around 4.8 percent on Reuters, at least 300 basis points above expected U.S. interest rates in December.

The closely-watched TED spread -- the difference between market-based dollar rates and three-month U.S. government borrowing rates -- stood around 300 basis points.

The spread, a gauge of risk aversion and tightness in short-term lending, ballooned last week to almost 500 basis points, the widest in over a quarter of a century.

Intensifying money market stress and a global shortage of dollars comes despite strenuous efforts by major central banks to pump in hundreds of billions of dollars of liquidity into the money market to keep the interbank system afloat.

Central banks in the euro zone, Britain and Switzerland stepped up their efforts on Friday with a new plan to pump in one-week dollar funds.

IMPASSE

Negotiations on the White House plan to buy up toxic assets came a cropper after Republicans offered a rival proposal to offer mortgage insurance. Talks were to continue later on Friday and some investors believed agreement would eventually be found.

"We are not too concerned about failure to announce the package overnight. We think this is natural politics playing its hand in the run up to the presidential elections," said Graham Secker, UK equity strategist at Morgan Stanley.

"We would expect some positive results from the discussions within the next few days."