(Updates prices, adds U.S. index futures)
* Stocks fall sharply on banking worries
* Dollar hits new all-time low against euro
* German, French sentiment indexes at lows
By Jeremy Gaunt, European Investment Correspondent
LONDON, July 15 (Reuters) - Fears about the world banking
system overwhelmed any lingering support from the U.S. plan to
rescue Fannie Mae and Freddie Mac on Tuesday, battering equities
and sending the dollar to a record low against the euro.
The U.S. currency fell to $1.6038 to the euro <EUR=>, its
lowest ever level, European shares slid more than 2.5 percent
and futures for the three top Wall Street stock indexes <NDc1>
<SPc1> <DJc> pointed to falls of around 1 percent.
The euro's rally was only very briefly dented by a bigger
than forecast slump in the German ZEW investor expectations
index to a series low of -63.9 in July. The euro dipped but
quickly regained its poise to surge above April's record high.
Any lingering sentiment boost investors managed to take from
the U.S. Federal Reserve and Treasury Department plan to lend
money and buy equity in mortgage giants Freddie and Fannie Mae
was soon dissipated in a sea of worry about other financial
institutions.
"Sentiment is really fragile," said Louis Wong, research
director with Phillip Securities in Hong Kong. "Investors are
worried that there might be more bank failures, especially small
banks in the United States."
MSCI's main world stock index <.MIWD00000PUS> was at a
21-month low and on track for an 11th consecutive daily loss.
Emerging market counterpart <.MSCIEF> lost more than 2 percent
while Asia stocks <.MIAS00000PUS> fell to a two-year low.
The pan-European FTSEurofirst 300 <> was down 2.5
percent and Japan's benchmark Nikkei average <> closed down
just shy of 2 percent.
"Right now though it's still a how weak can the dollar go as
opposed to the European story. Weak German growth probably pales
in comparison to the serious problems with Fannie Mae and
Freddie Mac," said UBS currency strategist Geoffrey Yu.
The dollar was weak across the board at a three-month low
against a basket of major currencies <.DXY>.
"It's just doom and gloom at the moment and there is no sign
of an end to it," said IG Index chief markets analyst David
Jones.
FEAR OF FAILURE
The catalyst for the widespread gloom is a renewed fear that
the credit crisis which began shaking the financial system a
year ago may not be over, as many had hoped.
On top of the troubles at Fannie <FNM.N> and Freddie
<FRE.N>, two pillars of the U.S. mortgage system, regulators
seized the U.S. mortgage lender IndyMac Bancorp Inc <IMB.N> late
last week following withdrawals by panicked clients.
Many investors initially reacted positively on Monday after
the Fed and Treasury indicated they would not let Fannie and
Freddie fail, but markets soon began focusing on the reason that
such commitments were needed in the first place.
"The conditions are foul and it is possible that the
downwards spiral continues if a possible run on banks in the
U.S. intensifies," said Stefan de Schutter, an asset manager at
Alpha Trading in Frankfurt.
The worries have come on top of other fears for the future,
including record high oil prices threatening inflation, slowing
growth in the U.S. and European economies, and rising
geopolitical concerns revolving around the Middle East.
European credit spreads widened sharply, led by financials
and tracking U.S. credit spreads overnight.
"Yesterday the crisis was over and today the crisis is
back," a trader in London said.
The iTraxx Crossover index <ITCRS5EA=GFI>, made up of 50
mostly "junk"-rated credits, was 20 basis points wider at 560
basis points.
Crude oil <CLc1> was up around $1.3 on the day at more than
$146 a barrel.
Euro zone government bond prices gained. Ten-year Bunds
yielded <EU10YT=RR> 4.36 percent, down 3 basis points, while the
two-year Schatz yield <EU2YT=RR> was down around 8 basis points
at 4.303 percent.
(Additonal reporting by Sitaraman Shankar and Amanda Cooper;
Editing by Victoria Main)
