January 23, 2008 / 5:53 PM / in 9 years

GLOBAL MARKETS-Stocks fall, bonds climb as recession fears rule

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(Recasts, updates prices, adds comment)

NEW YORK, Jan 23 (Reuters) - U.S. and European stocks slid on Wednesday, hammered by persistent worries about a U.S. recession, one day after the Federal Reserve's surprise interest rate cut boosted global markets.

Safe-haven government bonds and the yen, which tend to rise as investors pare risky trades, gained ground. Commodities, including oil, sagged on nagging fears that slower global growth will hurt demand.

European stocks closed at their lowest level in 1-1/2 years on Wednesday, as fears of more mortgage-related write-downs again hit bank shares.

In the United States, all three major stock indexes fell more than 1 percent as disappointing outlooks from technology leaders Apple Inc (AAPL.O) and Motorola Inc MOT.N added to recession fears.

"When the Fed cuts 75 basis points, stocks are supposed to go up," said T.J. Marta, fixed income strategist at RBC Capital Markets. "That's not happening. There's a lot of dread out there."

The Dow Jones industrial average .DJI was down 186.15 points, or 1.55 percent, at 11,785.04. The Standard & Poor's 500 Index .SPX was down 23.78 points, or 1.81 percent, at 1,286.72. The Nasdaq Composite Index .IXIC was down 62.46 points, or 2.72 percent, at 2,229.81.

The weak profit outlook from iPod maker Apple helped push the Nasdaq composite index across a bear market threshold in early trading.

"The market is pricing in a recession," said Brian Gendreau, investment strategist at ING Investment Management.

The Fed on Tuesday slashed its key federal funds rate by three-quarters of a percentage point -- the largest cut in more than 23 years -- to 3.5 percent a week ahead of its scheduled policy-setting meeting, underscoring the risks facing the U.S. economy.

Investors believe a lot more needs to be done by the U.S. central bank to shore up the U.S. economy, which some see on the brink of recession, hit by a slumping housing market and tight credit. Markets have priced in a further half-point rate cut at next week's Fed meeting. FEDWATCH

Europe Lower

After rising as much as 1.6 percent, the FTSEurofirst 300 .FTEU3 index of top European shares closed down 3.22 percent at 1,262.40 points.

Worries about profits and bad debt write-downs took a toll on banks such as Societe Generale (SOGN.PA).

Asian markets managed gains earlier in the global session, with Japan's benchmark Nikkei.N225 rising 2 percent. Analysts said the gains in Japan could have been due to the 16 percent decline in the Nikkei this year, which made the index more than due for a rebound.

Commodities were vulnerable as recession fears gripped markets. Copper MCU3 was down slightly on the London Metal Exchange, while U.S. crude CLc1 fell more than 2 percent to $87.25 a barrel.

"The Fed's move implied that the problems in the system are much worse than we expected," said Eugen Weinberg at Commerzbank in Germany.

Bonds, Yen Up

The recession fears fueled safe-haven buying of U.S. government bonds, sending U.S. Treasuries higher and pushing the benchmark yield briefly to its lowest level since June 2003.

The benchmark 10-year Treasury note's price traded with a yield of 3.32 percent US10YT=RR, down from 3.42 percent late on Tuesday. It was the first dip below 3.4 percent since mid-2003. The 10-year Bund yield EU10YT=RR slipped to 3.89 percent. Bond yields move inversely to prices.

In the currency market, the dollar shed 1 percent against the yen to 105.59 JPY= on the day, while the euro slid 1.5 percent against the yen EURJPY=.

Falling stock markets are typically seen as a sign that investors are wary of taking on too much risk.

In currency markets, this translates into selling higher-yielding units for low-yielding currencies like the yen. (Reporting by Nick Olivari; Additional reporting by Lucia Mutikani, Richard Leong, Kristina Cooke and Ellis Mnyandu in New York, Ian Chua in London and Elaine Lies in Tokyo; Editing by Leslie Adler)

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