* U.S. stocks drop sharply as bailout plan moves to vote
* U.S. Treasuries and dollar gain on flight to safety
* Central banks pump cash into paralyzed money markets
* Citigroup buying Wachovia assets
* Handful of European banks partially nationalized
(Updates with central bank cash injections, US markets, new dateline and byline)
By Daniel Bases
NEW YORK, Sept 29 (Reuters) - Investors bought U.S. Treasuries and dumped stocks globally in a scramble for safety on Monday, amid a credit crisis that has U.S. lawmakers moving quickly to vote on a $700 billion financial rescue plan while central banks pumped more money into paralyzed money markets.
Gold prices surged in the search for safety while a handful of banks in Europe were partially nationalized over the weekend to protect them from failure.
To counteract the financial crisis that has spread worldwide from last year’s U.S. mortgage market meltdown, the Federal Reserve announced a $330 billion expansion of arrangements to boost U.S. dollar liquidity throughout the global financial system which has become paralyzed by fear.
The euro fell nearly 2.0 percent against the U.S. dollar at one point, but has since gained back some ground. Emerging market currencies were pulled lower against the U.S. dollar in a flight to safety.
“With the news of Wachovia this morning, Washington Mutual last week, it just seems a lot of these banks are getting whacked,” said Cleveland Rueckert, market analyst at Birinyi Associates Inc in Stamford, Connecticut.
“People are apprehensive this morning that it (the U.S. bailout plan) might not get passed and we’re going to continue to see bank failures,” he added.
U.S. Treasury debt prices soared as cash poured into the market looking for a safe haven. The benchmark 10-year Treasury US10YT=RR was up more than 1-1/2 points in price, pushing the yield down to 3.67 percent.
“The Treasury market was already rallying strong and has spiked to new highs in the wake of this (Fed announcement), in part related to the crisis nature of the actions,” said John Canavan, market analyst at research company Stone & McCarthy in Princeton, New Jersey.
The picture was bloodier in U.S. stock markets where the benchmark Standard & Poor's 500 stock index .SPX fell 37.70 points, or 3.11 percent, to 1,175.31.
The Dow Jones industrial average .DJI dropped 242.45 points, or 2.18 percent, to 10,900.68.
MSCI's main world equity index .MIWD00000PUS plunged 4.13 percent on Monday, putting on track for the biggest one-day loss in at least 20 years. The index is at its lowest level since Sept. 18.
MSCI's emerging markets stock index dropped 5.85 percent .MSCIEF while yield spreads widened by 21 basis points to 400 basis points between U.S. Treasuries and emerging market sovereign bonds 11EMJ, indicating low risk appetite.
U.S. light crude oil futures CLc1 fell 6.05 percent, reflecting growing concerns over energy demand as the financial crisis spread further to Europe.
Gold XAU= gained 1.80 percent to $894.20 an ounce.
FAILURES AND SAVIORS
The intensity of the credit crisis has increased in Europe, sending the FTSEurofirst 300 index of top European shares down 4.82 percent to a 2-1/2 year low.
“A rescue plan worth 700 billion is simply not enough to overcome the crisis for the foreseeable future. If anything, all the real economy problems will escalate as a result in the foreseeable future,” said Carsten Klude, strategist at MM Warburg.
The yield on the two-year benchmark European government bond fell to a five month low, dropping more than 40 basis points to as low as 3.424 percent EU2YT=RR.
The Belgian, Dutch and Luxembourg governments rescued financial firm Fortis FOR.BR over the weekend to prevent a domino-like spread of failure.
Moreover, Iceland's government bought a 75 percent stake to take control of Glitnir GLB.IC after the bank's funding position deteriorated in recent days, knocking the crown currency to record lows against the euro.
German lender Hypo Real Estate HRXG.DE struck a last-minute deal with the government and a consortium of banks to resolve a refinancing squeeze.
“The nationalizations have an incredibly negative read across the sector,” said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton. “The contagion is spreading to mainland Europe and everyone’s asking: who’s next?”
The dollar rose 0.60 percent against a basket of six major currencies .DXY.
Highlighting escalating tensions in the money market, the interbank cost of borrowing euros for three months rose to all-time highs of 5.2250 percent at the London fixing LIBOR, more than 100 basis points above expected interest rates. (Additional reporting by Ellis Mnyandu, John Parry, Burton Frierson in New York and Natsuko Waki, Naomi Tajitsu, and Sarah Marsh in London;)