Shares fall as Citi reignites credit fears

LONDON (Reuters) - World stocks fell and safe-haven bonds surged on Monday after major losses at Citigroup revived concerns about the health of financial firms hit by the credit market turmoil.

Wall Street was set for a weaker open, while the dollar fell against the yen and interbank lending rates for dollar deposits rose. Oil and gold prices slipped after last week's rally, weighing on emerging market assets.

Banking giant Citigroup (C.N)'s chairman and chief executive Charles Prince resigned on Sunday as the bank said it may write off $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down last quarter.

Concerns about the banking sector, and its exposure to U.S. subprime mortgage loans, triggered a sell-off in risky assets including stocks in August and September and pushed up the cost of interbank borrowing sharply.

Citi's announcement renewed such fears, with uncertainty over how much other banks are exposed to the credit market compounding worries about the impact on global growth.

"The news of Citigroup has focused attention on financial institutions and has reduced risk appetite generally," said Derek Halpenny, senior currency economist at BTM-UFJ in London.

The MSCI main world equity index was down more than half a percent, edging away from last week's record high. The index is still up more than 13 percent since January.

U.S. stock futures were down, indicating a weaker open on Wall Street. Citi shares were down 2 percent before the bell.

The FTSEurofirst 300 index .FTEU3 fell 0.7 percent, dragged lower by weak banking shares and J Sainsbury (SBRY.L) after Qatar's Delta Two dropped its planned bid for the retailer.

The iTraxx Crossover index, the mostly-widely watched indicator of European credit market sentiment, widened by 13.5 basis points to 359 bps.

MONEY MARKETS TIGHTEN

Interbank lending rates for two-month and three-month dollar deposits rose to 4.875 percent at their daily fixing LIBOR. Both rates stood above implied Fed funds for the period -- indicating stress in the money market.

Interbank borrowing costs shot up in August and September following the fallout from U.S. subprime mortgages and the near closure of the short-term asset-backed commercial paper market.

"It seems likely that market participants will continue to hoard cash as the subprime crisis unfolds," Goldman Sachs said in a note to clients.

The bank noted fears that some market participants may not be able to meet existing claims have faded recently.

"But this may come back to the forefront as we approach the 'year-end effect' -- the notion that at the turn of the year, a tight holiday calendar tends to worsen liquidity conditions, while some financial institutions may seek to cut down on leverage ahead of their annual balance sheet reporting."

The dollar hit a one-week low of 114.08 yen and stood at $1.4465 per euro, near last week's record low.

Emerging market stocks .MSCIEF, as measured by MSCI, were down 1.4 percent, while emerging sovereign spreads tightened by 1 bps. The December Bund future FGBLZ7 was up 23 ticks, after hitting a near two-week high earlier.

U.S. light crude was down 1.5 percent at $94.49 a barrel, having surged past $96 for the first time last week. Gold was down on the day, although it held above the $800 an ounce mark and near last week's 28-year high.

(Additional reporting by Meg Clothier)