* European stocks fall; MSCI world equity index up 1 pct
* Dollar, government bond yields fall; sterling tumbles
* Oil up 2 percent before OPEC
(Updates with fresh prices, quotes)
By Natsuko Waki
LONDON, Dec 17 (Reuters) - European stocks failed on
Wednesday to extend strong gains Asia on Wall Street as initial
optimism from the Federal Reserve's aggressive rate cut faded,
while the dollar hit a 2-1/2 month low versus the euro.
In a surprise move, the Fed cut its target for the benchmark
rate to zero to 0.25 percent from 1 percent on Tuesday,
virtually exhausting traditional measures to battle the
year-long recession. It also promised to take more action by
extending its quantitative easing measures.
Wall Street and Asia rallied in the wake of the Fed's move,
but Europe failed to follow through, with a stronger euro
threatening to hit the region's exporters. The dollar fell
broadly as the rate cut knocked its interest rate premium.
Government debt prices shot up as investors expect a
prolonged period of low interest rates, pushing the benchmark
10-year U.S. Treasury yield to fresh five-decade lows.
"Traders are now concerned that the Fed may have played
their hand, and they now have little left in their arsenal
should the move fail to revive the economy," said Richard Curr,
Head of Dealing at Blue Index.
MSCI world equity index <.MIWD00000PUS> rose 1 percent,
trimming gains after hitting its highest level since Nov. 11.
The FTSEurofirst 300 index of leading European shares <>
fell 1.3 percent. Emerging stocks <.MSCIEF> rose 2.3 percent.
"The Fed can take rates no lower. And lower rates by
themselves won't do it. We've seen that in Japan, although it's
better to have low rates than high rates, for sure," said
Bernard McAlinden, investment strategist at NCB Stockbrokers in
Dublin.
U.S. crude oil <CLc1> rose 2 percent to $44.50 a barrel,
helped by the U.S. rate cut, a weaker dollar and expectations
that OPEC would cut supplies at a meeting this week.
The 10-year U.S. Treasury yield <US10YT=RR> stood at 2.23
percent, its lowest since at least 1951.
March Bund futures <FGBLc1> rose 130 ticks.
The dollar <.DXY> fell 0.2 percent against a basket of major
currencies while it fell to 88.45 yen <JPY=>, moving closer to a
13-year low. The U.S. currency fell to a 2-1/2 month low of
$1.4191 per euro <EUR=>.
Sterling hit record lows of 91.03 pence per euro <EURGBP=>
as expectations of further sharp UK rate cuts intensified
following the Fed's action. The pound was also knocked by weak
British labour data and the Bank of England minutes showing
policymakers had discussed an even bigger rate cut than 100
basis points delivered earlier this month.
Interest rate futures are showing the Bank of Japan could
cut the cost of borrowing to almost zero from 0.3 percent later
this week and possibly follow the U.S. into quantitative easing,
reviving a scheme it put in place five years ago.
(Additional reporting by Jon Hopkins and Brian Gorman; Editing
by Victoria Main)
