Bank writedown concerns drag global shares down

LONDON (Reuters) - Stocks fell while the dollar hit a 1-1/2 week low on Friday as concerns grew about further writedowns of subprime mortgage losses by banks following a ratings downgrade of a U.S. bond insurer.

Wall Street was set for a flat open later, a day after the Federal Reserve chief cast a downbeat U.S. economic outlook. Platinum hit historic highs on lingering supply concerns in South Africa, supporting emerging market assets.

Citi's equity research team said Swiss bank UBS may need to announce new writedowns of up to $18 billion. The total size of the banking sector writedowns of subprime mortgage-related losses is estimated at around $300-400 billion, around a third of which has so far come to light.

On Thursday, Moody's Investor Service cut its triple-A ratings on FGIC's bond insurance arm because of a $4 billion hole in the insurer's capital position. It raised fears that this would trigger a broader sell-off in bonds insured by FGIC and generating more writedowns for banks.

New York state officials said on Thursday that the recapitalization of U.S. bond insurers may occur soon, but if it fails, insurers could be forced to separate riskier activities from their municipal bond business.

"We know the banks have potentially more writedowns to make and a lot will depend on whether (New York Governor Eliot) Spitzer could push the bond insurers' recapitalization," said Edmund Shing, strategist at BNP Paribas in Paris.

"It's going to be crunch time, but it's in the interest of the banks to get the recap done."

The FTSEurofirst 300 index .FTEU3 erased early gains to fall 0.7 percent on the day while MSCI main world equity index .MIWD00000PUS was down slightly on the day.

UBS shares fell 5.3 percent to a 4-1/2 year low.

U.S. stock futures were largely steady.

DOWNBEAT FED

The dollar fell to a 1-1/2 week low of 75.927 against a basket of major currencies .DXY after Fed chairman Ben Bernanke said on Thursday the outlook for the economy had worsened in recent months.

Bernanke also pledged that the Fed would act in a timely manner to support growth, reinforcing market expectations the Fed would cut interest rates again in March, on top of a total 225 basis points of reductions since September.

"(Bernanke's) comments are likely to confirm the medium-term view that with its rate cuts the Fed is doing the right thing in order to stem downside risks for the U.S. economy," Commerzbank said in a note to clients.

"However, by highlighting the downside risks to growth, Bernanke confirmed prevailing aggressive rate cut speculation, which currently keeps the dollar under broad pressure."

The Markit iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, widened 16 basis points to 557 bps -- below record wides of 575 bps set earlier this week.

The widening reflects deteriorating sentiment in European credit markets. In August, the blowout in the iTraxx index -- made up of 50 mostly "junk"-related credits -- caused a sell-off in risky assets and stress in money markets.

Emerging stocks .MSCIEF rose a quarter percent while emerging sovereign spreads widened 1 bps.

The March Bund future was steady on the day.

Platinum rose as high as $2,028 an ounce as an energy crisis in South Africa forced another miner to forecast lower output in 2008.

Gold rose to $909.60 an ounce.

U.S. light crude rose 0.1 percent at $95.60 a barrel.

(Additional reporting by Blaise Robinson; editing by Tony Austin)