(Adds close of U.S. markets)
* Dow closes below 11,000 for first time in two years
* Oil slides as much as $9 in biggest slide since 1991
* Dollar rebounds from record low vs euro as oil falls
* Gold hits four-month high on renewed safe-haven buying
By Herbert Lash
NEW YORK, July 15 (Reuters) - Global stocks fell sharply on
Tuesday, knocked lower by growing fears over the outlook for
banks, but a big drop in oil prices alleviated equity markets
and eased safe-haven bids for gold and government debt.
After a day of volatile trade, the Dow closed below the
11,000 mark for the first time since July 2006.
But U.S. stocks cut heavy losses, helped by crude's decline
and a brief turnaround in financial shares after the head of
the Federal Reserve said banks are well-capitalized and
securities regulators announced an emergency rule on short
selling.
As much as $9.26 was shaved from the price of a barrel of
crude -- the largest drop in dollar terms in 17 years -- as
growing concerns about the U.S. economy stirred demand woes.
Crude slumped to a session low of $135.92 in the biggest
one-day drop since January 1991 after U.S. bombing of Iraq
began in the Gulf War.
Shares in Europe and Asia slid more than 2 percent as banks
got hammered, and investors around the world flocked to
government debt amid persistent worries about the global
outlook for the economy and the financial sector.
Fears about the world banking system overwhelmed lingering
support in equity markets for a U.S. government plan to rescue
mortgage finance companies Fannie Mae <FNM.N> and Freddie Mac
<FRE.N>, sending the dollar to a fresh record low against the
euro <EUR=>.
Investors also bid up the price of safe-haven government
debt and gold.
But the U.S. Securities and Exchange Commission said it
will will issue an emergency rule later on Tuesday to stop
"naked" short selling in major financial firms, including
Fannie and Freddie, pillars of the U.S. mortgage market.
After rebounding, the S&P financial index <.GSPF> turned
lower and fell almost 3 percent, hitting levels last seen in
May 1997.
The KBW Banks index <.BKX> also rebounded, but closed 3.1
percent lower after touching almost 14-year lows.
The rout in financial shares was particularly acute in
Europe and Asia.
"We're back into the panic mode we experienced back in
mid-March. The distrust is at a very high level and it is
totally justified," said Marie-Pierre Peillon, head of equity
and credit research at Groupama Asset Management in Paris.
"The U.S. housing crisis is getting worse and it has now
spread from the 'subprime' segment to the 'prime' segment, with
regional banks getting hit now," she added.
Fed Chairman Ben Bernanke provided little comfort for
investors anxious about the economy, saying in testimony before
the Senate Banking Committee that financial markets and
institutions remain under "considerable stress."
Bernanke's comments about increased risks to inflation and
economic growth were expected, but caused pause, said Steve
Goldman, market strategist at Weeden & Co in Greenwich,
Connecticut.
"It's still alarming to hear and the market did react to
this news, given Bernanke didn't sugar-coat the situation,"
Goldman said.
The Dow Jones industrial average <> slid 93.47 points,
or 0.85 percent, at 10,961.72. The Standard & Poor's 500 Index
<.SPX> fell 13.34 points, or 1.09 percent, at 1,214.96. The
Nasdaq Composite Index <> added 2.84 points, or 0.13
percent, at 2,215.71.
Nasdaq gained ahead of results to be released after markets
closed on Tuesday by technology bellwether Intel Corp
<INTC.O>.
But shares of Fannie Mae <FNM.N> slid 27 percent; Freddie
Mac <FNM.N> tumbled 26 percent. The two mortgage finance giants
guarantee almost $5 trillion in U.S. mortgages.
Shares of General Motors <GM.N>, a Dow component, slid 5
percent after the automaker announced a restructuring plan and
said it is suspending its dividend as part of efforts to
bolster its finances.
In Europe, the FTSEurofirst 300 <> index of top
European shares unofficially ended 2.1 percent lower at
1,110.09 points, after falling by more than 3 percent in
earlier trade. It was the index's lowest close since May 2005.
Banks bore the brunt of the slide with Fortis <FOR.BR>
<FOR.AS> the session's biggest loser. The stock sank 11 percent
on worries the Belgian-Dutch financial services group might
have to raise more funds and after the Dutch market regulator
said it was looking into the company's funding plan.
Fortis said it did not envisage any additional capital
increase.
Government debt rose though U.S. Treasury debt prices pared
some gains, losing some of their safe-haven allure as Wall
Street attempted to rebound.
The price of the U.S. long bond turned lower after being up
most of the day.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
8/32 to yield 3.83 percent. The 30-year U.S. Treasury bond
<US30YT=RR> slipped 5/32 to yield 4.46 percent.
"We're seeing broad based risk aversion across asset
classes," said Niels From, chief analyst at Nordea.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> down 0.27 percent at 71.758. Against the
yen, the dollar <JPY=> was down 1.30 percent at 104.76.
The euro <EUR=> fell 0.02 percent at $1.59.
U.S. crude <CLc1> settled down $6.44 at $138.74 a barrel.
London Brent crude <LCOc1> fell $5.17 to $138.75.
Gold pared gains after hitting a four-month high. August
futures <GCQ8> settled up $5 at $978.70 an ounce in New York.
"The problems on the equity markets, uncertainty, and
general risk aversion are all bullish for gold at the moment,"
said Lehman Brothers analyst Michael Widmer.
Overnight in Asia, stocks fell to a two-year low as
investor confidence waned in regional banks, which face high
inflation, tighter lending standards and massive volatility
from overseas markets.
Japan's Nikkei share average <> ended down 2 percent
at its lowest level since April 1. The MSCI pan-Asia equity
index <.MIAS00000PUS> dropped 1.9 percent after earlier hitting
a near two-year low.
(Reporting by John Parry, Nick Olivari, and Santosh Menon,
Kirsten Donovan, David Sheppard and Jan Harvey in London and
Blaise Robinson in Paris)
(Reporting by Herbert Lash; editing by Gary Crosse)
