* Dow, S&P 500 down more than 10 pct from Jan. 26 record highs
* Bond yields add to rate worries
* BOE’s hawkish message lifts sterling, gilt yields
* Sentiment in stock markets remains frail (Updates with closing U.S. markets’ levels)
By Caroline Valetkevitch
NEW YORK, Feb 8 (Reuters) - The selloff in world stock indexes deepened on Thursday, with the fall in U.S. stocks confirming a correction for the market, in another volatile session stirred by concern over rising bond yields.
The S&P 500 ended down 3.8 percent and the Dow ended down 4.2 percent. With those declines, the indexes confirmed they were in correction territory, both falling more than 10 percent from their Jan. 26 record highs and leaving investors worried about how much longer the selloff may go.
U.S. stocks began to wobble last Friday after a healthy U.S. labor market report sparked a spike in bond yields and fears of rising inflation.
Equity investors are worried the likelihood of a stronger U.S. economy and higher inflation could lead the Federal Reserve to boost interest rates more times than previously anticipated.
“At this point a lot of it is about risk assets,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
“Higher rates are going to slow the economy, we just don’t know when and we don’t know which rates to watch, and I think that’s the debate that’s currently playing out in the market,” he said.
While those concerns have been the catalyst for recent selling, the retreat in equities had been long awaited by investors as the market climbed almost steadily to record highs earlier this year.
“Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment but that’s reversing a little bit and that’s what we are staring at now,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.
The Dow Jones Industrial Average fell 1,032.89 points, or 4.15 percent, to 23,860.46, the S&P 500 lost 100.66 points, or 3.75 percent, to 2,581 and the Nasdaq Composite dropped 274.83 points, or 3.9 percent, to 6,777.16.
The S&P 500 last confirmed a correction in January 2016, when it fell 13.3 percent amid concerns about a slump in oil prices.
The pan-European FTSEurofirst 300 index lost 1.74 percent and MSCI’s gauge of stocks across the globe shed 2.45 percent.
Emerging market stocks lost 0.88 percent.
The recent selloff, sparked by last Friday’s jump in Treasury yields, sent the VIX index, Wall Street’s “fear gauge,” sharply higher. The index ended back up above the 30 level on Thursday.
U.S. Treasury yields climbed earlier after the Bank of England said interest rates probably need to rise sooner, adding to expectations of reduced central bank monetary stimulus around the world.
An improving outlook internationally is adding to pressure on global fixed income markets. The Bank of England raised its growth forecasts for Britain due to the strong global recovery.
Volatility in equities, though, has also added to a bid to hold low-risk U.S. government debt.
Benchmark 10-year notes last rose 1/32 in price to yield 2.8276 percent, from 2.832 percent late on Wednesday.
Oil prices fell to their lowest in seven weeks amid fears of rising global supplies after Iran announced plans to increase production and U.S. crude output hit record highs.
U.S. crude oil dropped 1 percent to settle at $61.15 a barrel, while Brent fell 1.1 percent to $64.81.
In the foreign exchange market, the dollar was flat after earlier hitting two-week highs against a basket of major currencies as investors reduced bearish bets on the greenback.
The dollar index rose 0.06 percent, with the euro down 0.02 percent to $1.2243.
Additional reporting by Lewis Krauskopf, Karen Brettell in New York, and Yashaswini Swamynathan; Editing by Susan Thomas, Bernadette Baum and Chizu Nomiyama