GLOBAL MARKETS-Stocks, dollar tumble on bank, economy woes

(Adds Wall Street outlook)

By Natsuko Waki

LONDON, March 3 (Reuters) - World stocks tumbled while the dollar plumbed record lows on Monday as fresh concerns about the health of the banking sector and a U.S. recession drove investors to safe-haven gold and government bonds.

Emerging markets took a beating as investors dumped risky assets, while the cost of corporate bond insurance rose after last week's weak U.S. confidence data and a regional business survey intensified worries about the world's biggest economy.

HSBC (HSBA.L) announced bigger-than-expected bad debts of $17.2 billion due to problems in the U.S. housing market. The global banking sector is expected to suffer a total of $300-400 billion write-downs from the credit crunch, threatening to derail growth in the broader economy.

"The market has no confidence in global growth, particularly growth in the United States, and has great fears of the credit crisis," said David Buik of Cantor Index.

The FTSEurofirst 300 index .FTEU3 was down 1.7 percent on the day while MSCI main world equity index .MIWD00000PUS fell 1.3 percent to hit a one-week low.

HSBC shares fell more than 1 percent before turning positive, while the broader bank sector index .SX7P was down 1.8 percent on the day in Europe, dragging down broader indices along with technology and insurer shares.

Also souring sentiment, billionaire investor Warren Buffett told CNBC he was no longer offering to guarantee $800 million of municipal bonds backed by three large U.S. bond insurers.

Uncertainty over the fate of these bond insurers has spooked investors for weeks as potential downgrades of their ratings due to their exposure to U.S. subprime mortgages could set off a wave of forced selling and lead to more losses by banks.

U.S. stock futures slipped half a percent SPc1, indicating a weaker opening on Wall Street after major indexes ended the month in the red for the fourth month in a row, marking the longest string of monthly losses for Dow and S&P 500 since 2002.

The dollar fell to all-time lows against a basket of major currencies .DXY as recession fears cemented expectations for U.S. interest rate cuts with investors pricing in a more than 70 percent chance of a three-quarter point rate cut in March.

The dollar also hit a three-year low against the low-yielding yen of 102.62 JPY=, with export-damaging yen strength weighing on Japanese shares .N225.

GROWTH/INFLATION TRADEOFF

Expectations that the Federal Reserve and other central banks would cut interest rates to spur the ailing economies have kept world stocks off January's 15-month low, although inflationary pressures might discourage monetary authorities from easing dramatically.

Data showed euro zone inflation held at record 3.2 percent last month, while a survey found the region's manufacturing activity eased in February but prices charged at the factory gate rose at their fastest pace in nearly a year.

Recent U.S. data also showed acceleration in both producer and consumer price rises in February.

"We are seeing the deepest housing deflation since the Great Depression and a massive unwind of the largest credit binge ever, and fiscal and monetary policies are more limited in their ability to respond than earlier this decade. Not good news for the economy or the equity market," David Rosenberg, North American economist at Merrill Lynch, said in a note.

Central banks in the euro zone and Britain are expected to leave interest rates on hold this week. The Bank of England is forecast to cut rates again in May, while interest rate futures are pricing in an around 70 percent chance of a euro zone rate cut by June, up from 20 percent last week.

The iTraxx Crossover index ITCRS5EA=GFI, the most-widely watched indicator for European credit market sentiment, widened to 612 basis points.

Emerging sovereign spreads 11EMJ hit 291 basis points over U.S. Treasuries, their widest in five weeks. Emerging stocks .MSCIEF fell 2.6 percent.

Euro zone government bonds were higher, with ten-year yields hitting a three-week low of 3.835 percent EU10YT=RR. The March Bund future FGBLH8 was up 37 ticks.

Gold XAU= -- seen as an inflation hedge and safe-haven asset -- rose as high as $984.60 an ounce while silver XAG= rose to $20 an ounce for the first time since November 1980.

U.S. light crude CLc1 fell 0.6 percent to $101.19 a barrel, below last week's record highs, as concerns rose that a U.S. recession would sap demand for oil. (Additional reporting by Dominic Lau, editing by David Christian-Edwards)