(Adds close of European stock markets)
By Chuck Mikolajczak
NEW YORK May 15 Global equity markets were rattled and investors flooded into safe-haven benchmark U.S. and German government bonds on Thursday on fears over Russia and Ukraine, along with mixed U.S. and weak European economic figures.
Slovak Prime Minister Robert Fico said Russia's Vladimir Putin told multiple European states that Moscow will not supply gas to Europe as of June 1 if Ukraine does not pay its bills. However, Moscow and Kiev have taken some tentative steps to resolve this dispute.
U.S. stocks were more than 1 percent lower, as weakness in small-cap issues continued. The Russell 2000 small-cap index was on pace for its third straight decline and in correction territory, having dropped more than 10 percent from its record close earlier this year.
European stocks closed down 0.8 percent, erasing early gains to a six-year peak after data showed the euro zone expanded by just 0.2 percent on a quarter-over-quarter basis in the first three months of 2014, boosting expectations of stimulus action from the European Central Bank.
The MSCI world equity index also fell 0.9 percent. Bond prices in Spain, Italy and other peripheral European nations fell sharply, erasing early gains.
Yields on benchmark 10-year U.S. Treasury notes fell as low as 2.47 percent, lowest since October 30. The U.S. bond market rallied in tandem with Europe's, bolstered by weak euro zone growth that further cemented expectations the European Central Bank will lower rates in June.
"People are pouring into bonds because they don't believe the growth story in the U.S. is going to be very large," said Keith Bliss, senior vice-president at Cuttone & Co in New York. "If you don't believe the growth story you also have trouble staying with the valuations of equities at this point in time and then the external factors of global geopolitical intrigue that will hit the markets occasionally."
The Putin news and weak U.S. industrial production data and a fall in U.S. homebuilder sentiment stoked the safe-haven rally.
The Dow Jones industrial average was down 201.14 points, or 1.21 percent, at 16,412.83. The Standard & Poor's 500 Index was down 23.13 points, or 1.22 percent, at 1,865.40. The Nasdaq Composite Index was down 49.70 points, or 1.21 percent, at 4,050.93.
ECB President Mario Draghi signaled last week that the bank was poised to ease monetary policy next month to support the euro zone economy. Federal Reserve Chair Janet Yellen has also suggested continued support for the U.S. economy.
The euro was down 0.05 percent to $1.3707 after hitting a low of $1.3647, while Germany's 10-year Bund yield hit its lowest in a year at 1.30 percent. (Reporting by Chuck Mikolajczak; Editing by Dan Grebler)