* AIG results weigh on financial sector
* Oil below $119, down around $30 from record high
* G7 recession becomes real possibility
(Updates prices, adds Hong Kong, Shanghai markets)
By Kevin Plumberg
HONG KONG, Aug 7 (Reuters) - Asian stocks fell and
government bonds rose on Thursday, as a sustained decline in
oil prices could not shake a sense of gloom among investors
about financial sector instability and the worsening global
growth outlook.
The U.S. dollar slipped against the yen after jumping to a
seven-month high on Wednesday. It was also slightly weaker
against the euro ahead of a European Central Bank policy
decision due later, widely expected to keep interest rates on
hold at 4.25 percent.
Crude oil was trading just below $119 a barrel <CLc1>,
having tumbled nearly 20 percent from July's record high, as
expectations for U.S. energy demand continue to deteriorate.
Concerns about wavering demand in China, whose economy has
devoured natural resources for the last decade and pushed up
commodity prices, also weighed on copper prices.
Lower oil prices could be interpreted as relief for U.S.
consumers, on whom Asia depends for export demand. But
inflation was still a global threat, bad loans continued to dog
banks and insurers, and investors faced the prospect that all
of the Group of Seven rich nations could slip into recession.
As a result, optimism was in short supply.
"Certainly the environment is one that should be positive,
with the weaker yen and lower oil prices," said Hideyuki
Ishiguro, supervisor at the investment strategy department at
Okasan Securities. "But the idea that Japan's economy isn't
good is spreading."
Japan's Nikkei share average <> fell about 1.5
percent, led by a 4.6 percent drop in shares of clothing
company Fast Retailing Co Ltd <9983.T>.
Large bank stocks like Mitsubishi UFJ Financial Group
<8306.T> declined after American International Group Inc
<AIG.N>, the world's largest insurer, posted a third straight
quarterly net loss after U.S. markets closed on Wednesday.
[]
Outside Japan, Asia-Pacific stocks <.MIAPJ0000PUS> edged
down 0.5 percent, within sight of a 16-month low plumbed on
Tuesday.
Hong Kong's Hang Seng index <> was largely unchanged,
erasing early gains, with shares of China's top offshore oil
producer CNOOC Ltd <0883.HK> the biggest weight.
Cathay Pacific Airways <0293.HK> was the top percentage
decliner on the index, down 4.8 percent, after the airline on
Wednesday posted its first interim loss in five years.
CENTRAL BANK DILEMMA: HIGHER GROWTH OR LOWER INFLATION?
South Korea's benchmark KOSPI <> dropped 1.5 percent,
weighed down by the financial sector after the Bank of Korea on
Thursday raised its main interest rate by 25 basis points (bps)
to its highest in 7-
