Global stocks fall on renewed credit fears

NEW YORK (Reuters) - Global stocks and the dollar fell sharply on Wednesday while the yen and government bonds soared as concerns for the health of the U.S. economy stirred another massive wave of risk averse investing.

Near-record oil prices also fanned fears that energy costs could crimp consumer spending.

Shares of financial companies such as Goldman Sachs Group Inc (GS.N) led the steep equities sell-off in the United States, while stock in big manufacturers and retailers fell on concern about the impact of surging energy prices.

"There's a heck of a lot of bad news out there, given the credit conditions, housing market and volatility in the financial markets," said Jon Basile, economist at Credit Suisse in New York.

Yields on U.S. 10-year Treasury bonds reached below 4 percent for the first time since 2005 and European credit spreads widened after the Federal Reserve projected on Tuesday that growth in the world's biggest economy would slow next year to between 1.8 percent and 2.5 percent, sharply lower than earlier forecasts in June.

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Investors were nervous that banks will report further write-downs related to subprime mortgages, which helped drive up interbank lending rates to a six-year high in Europe. At the same time, inflation concerns were on the rise with oil prices blasting past $99 a barrel to a record during the day before easing slightly after inventory data was released.

Those worries weighed on stocks, with the Dow Jones industrial average .DJI down 114.45 points, or 0.88 percent, at 12,895.28. The Standard & Poor's 500 Index .SPX was down 12.51 points, or 0.87 percent, at 1,427.19, while the Nasdaq Composite Index .IXIC was down 16.62 points, or 0.64 percent, at 2,580.19.

In currencies, the dollar was down against a basket of major trading-partner currencies, with the U.S. Dollar Index .DXY down 0.20 percent at 75.051 from a previous session close of 75.205.

The euro EUR= was up 0.14 percent at $1.4842 from a previous session close of $1.4821 and off a record high around $1.4850 hit earlier in the session.

Against the Japanese yen, the dollar JPY= was down 1.32 percent at 108.50 from a previous session close of 109.95. The dollar hit a 2-1/2 year low against the yen around 108.27 during the session.

In government debt, the benchmark 10-year U.S. Treasury note US10YT=RR was up 22/32, with the yield at 4.01 percent, while the 2-year U.S. Treasury note US2YT=RR was up 11/32 for a yield of 3.01 percent.

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U.S. light sweet crude oil CLc1 was down 21 cents, or 0.21 percent at $97.82 per barrel after reaching a record $99.29 per barrel.

"So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices," said David Wyss, chief economist at Standard & Poor's in New York. "But with gasoline back to more than $3 per gallon and the winter heating season approaching, will consumers finally flinch?"

Earlier in the day, the FTSEurofirst 300 index .FTEU3 was down 2.35 percent on the day after hitting a three-month low. The MSCI main world equity index .MIWD00000PUS was down 1.75 percent.

Gold futures rose for a second straight day, driven higher by the falling dollar and strong oil prices. December gold on the COMEX division of the New York Mercantile Exchange was up $7.40 at $798.80 per ounce.

European financial credit spread, as measured by iTraxx ITFSR5EA=GFI, hit record highs, driven by spiraling fears over bank write-downs and illiquidity. The wider iTraxx Crossover index ITCRS5EA=GFI widened 17 bps to 402 bps.

London interbank offered rates for two-month euro deposits hit 6-1/2 year highs of 4.65250 percent LIBOR, with the premium over expected policy rates for the same period reaching 57 basis points.

(Additional reporting by Natsuko Waki in London; Ellis Mnyandu, Richard Leong, Gene Ramos and Ellen Freilich in New York; Editing by Richard Satran)