Renewed credit concerns weigh on global stocks, dollar

LONDON (Reuters) - Stocks fell broadly and the dollar and sterling hit record lows against the euro on Thursday as fresh concerns about the health of the banking sector and the broader economy jolted financial markets.

Optimism that the worst of credit crisis may be over tapered off after Lehman Brothers LEH.N said in a filing with the U.S. Securities and Exchange Commission it had liquidated three funds that had lost value and took a balance sheet hit.

Sterling was at a 11-year low on a trade-weighted basis as the Bank of England cut interest rates, citing concerns about tighter credit conditions and a deteriorating economic outlook.

The BoE's decision to trim rates by a quarter percentage point to 5 percent disappointed some who had bet on a bigger half-point cut. The European Central Bank left interest rates on hold at 4 percent as expected, with its focus firmly on inflation.

"Credit conditions have tightened and the availability of credit appears to be worsening," said Ann O'Kelly, economist at Citigroup.

"The disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the (BoE's) target." The BoE targets inflation within one percentage point either side of 2 percent.

The FTSEurofirst 300 index .FTEU3 was down 1.3 percent while MSCI main world equity index .MIWD00000PUS was down slightly on the day. U.S. stock futures fell half a percent, indicating a weaker start on Wall Street.

Sterling had fallen as far as 80.29 pence per euro and held near that level after the BoE decision. The trade-weighted sterling index is at its weakest since 1996.

"They (BoE) haven't really done that much to address the shortage of liquidity, so that means that, even as they cut the official bank rate, those lower interest rates aren't getting passed on to consumers and other borrowers," said Chris Iggo, strategist at Axa Investment Managers.

"They need to both keep cutting rates and try to improve liquidity and only then will lower interest rates start to affect the real economy."

RENEWED CONCERNS

News from Lehman and the BoE's comments followed soft first-quarter earnings reports this week and the IMF's grim assessment of bank sector losses and the global economy.

The IMF cut its 2008 world growth forecast this week and said losses from the credit crisis would approach $1 trillion.

This has overshadowed expectations that Group of Seven rich nations would unveil a drastic plan that would help stabilize banks and financial markets at their meeting this weekend.

The dollar hit record lows of $1.5912 per euro, while it fell 0.5 percent against a basket of currencies .DXY.

Emerging sovereign spreads widened 1 basis point while emerging stocks .MSCIEF were up half a percent.

The June Bund future rose 70 ticks, garnering safe-haven flows.

U.S. light crude rose half a percent to $111.44 a barrel, within striking distance of Wednesday's record high of $112.21. Gold ticked higher to $933.50 an ounce, helped by oil prices.

(Editing by Ruth Pitchford)