* U.S. stocks drop sharply as U.S. bailout plan is voted
* U.S., euro zone government debt soar in flight to safety
* Oil falls to below $99 a barrel on slower growth outlook
* U.S. bailout for banking system not viewed as panacea
(Adds close of European markets, updates prices, changes
dateline; previous LONDON)
By Herbert Lash
NEW YORK, Sept 29 (Reuters) - U.S. stocks plunged on Monday
on fears that U.S. approval of a $700 billion financial system
bailout would fail on a day bank nationalizations in Europe and
a U.S. banking takeover sent skittish investors fleeing to the
safety of government debt, gold and the low-risk yen.
The euro and the British pound tumbled against the dollar
and crude oil prices dropped nearly 8 percent to below $99 a
barrel on signs the financial crisis was spreading beyond the
United States to Europe and would cut energy demand worldwide.
U.S. and euro zone government debt soared in one of the
biggest rallies for fixed-income securities this year as fears
of spreading bank failures overshadowed moves by central banks
to pump hundreds of billions of dollars into frozen markets.
Shortly before 2 p.m. (1800 GMT), the Dow Jones industrial
average <> was down 494.85 points, or 4.44 percent, at
10,648.28 after earlier skidding 700 points in its largest
point-drop ever for the Dow. The Standard & Poor's 500 Index
<.SPX> was down 72.69 points, or 5.99 percent, at 1,140.32. The
Nasdaq Composite Index <> was down 135.36 points, or 6.20
percent, at 2,047.98.
Voting on a U.S. financial system bailout began in early
afternoon and was not expected to last long. But it could take
some time if congressional leaders need time to rally support.
Gold jumped as much as 2.8 percent and aversion to risk
boosted the low-yielding Japanese yen as investors flocked to
their safe-havens amid heavy losses in global equity markets
and after Germany's central bank said it will hold onto the
vast bulk of its gold reserves in the next 12 months.
The leading index of European shares fell more than 5
percent to a three-and-a-half year closing low. Banking shares
weighed on the index amid growing fear about the health of the
financial industry on both sides of the Atlantic.
"Investors are fearful, frenetic, especially when it comes
to banking shares. They want to get out now and see the
after-effects from afar," said Frank Geilfuss, head analyst at
Bankhaus Loebbecke.
As U.S. lawmakers met in Washington to vote on a $700
billion bailout of troubled banking assets, analysts questioned
whether the plan was sufficient, would come soon enough to
shelter the U.S. economy and stem worldwide financial turmoil.
European authorities were forced over the weekend to rescue
a slew of European banks, while U.S. regional bank Wachovia
Corp <WB.N> sold most of its assets to Citigroup <C.N> in a
deal brokered by the Federal Deposit Insurance Corp.
Global money markets remained frozen even as central banks,
including the Federal Reserve, pumped $330 billion into world
markets in an attempt to boost liquidity.
"There's a monster amount of fear out there. This is global
contagion. It's no longer just the United States," said Joe
Saluzzi, co-manager of trading at Themis Trading in Chatham,
New Jersey.
Eric Kuby, chief investment officer of North Star
Investment Management Corp in Chicago, said: "We started Monday
with more fear than when we left on Friday."
Signs of the potential impact of the financial crisis could
be seen in the stock of Apple Inc <AAPL.O>, whose shares fell
as much as 17.5 percent on concerns that the maker of the iPod
and iPhone will suffer as economic growth slows. Apple led the
Nasdaq to fall almost 5 percent.
In Europe, the British government took over troubled
mortgage lender Bradford & Bingley <BB.L> and three European
governments partially nationalized banking and insurance group
Fortis <FOR.BR><FOR.AS>. Germany's government threw a lifeline
to cash-strapped lender Hypo Real Estate <HRXG.DE>.
The FTSEurofirst 300 index <> of leading European
shares ended down 5.23 percent at 1,047.04 points -- its lowest
closing level since January 2005.
The benchmark, down about 27 percent this year, also
notched its biggest one-day percentage decline since Jan. 21.
European government bonds surged, pushing the two-year
yield to a five-month low. U.S. government debt also surged.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
40/32 to yield 3.70 percent, and the 2-year U.S. Treasury
note<US2YT=RR> gained 11/32 to yield 1.9 percent.
The euro fell nearly 2.0 percent against the U.S. dollar at
one point, but later pared losses. Sterling dropped to a 10-day
low at $1.7962 <GBP=>, and was last down more than 2 percent at
$1.8028, its biggest one-day loss since December 1996.
The euro <EUR=> fell 1.45 percent at $1.4401, while against
the yen, the dollar <JPY=> fell 0.85 percent at 105.07.
The U.S. Dollar Index <.DXY> rose 0.72 percent at 77.847.
"Investors are very concerned that there would be more
weakness in the market and more bank failures to come, despite
the latest central bank action," said Steven Butler, director
of FX trading at Scotia Capital in Toronto.
MSCI's all country world equity index <.MIWD00000PUS>
plunged 4.7 percent, putting it on track for the biggest
one-day loss in at least 20 years.
MSCI's emerging markets stock index <.MSCIEF> dropped 5.2
percent while yield spreads widened by 21 basis points to 400
basis points between U.S. Treasuries and emerging market
sovereign bonds, indicating low risk appetite.
U.S. light sweet crude oil <CLc1> fell $7.67 to $99.22 a
barrel, while London Brent crude <LCOc1> traded down $6.89 to
$96.65 a barrel.
Spot gold prices <XAU=> rose $15 to $893.40 an ounce.
Asian stocks fell 2 percent overnight on questions about
the effectiveness of the U.S. government plan for the financial
system.
Japan's Nikkei share average <> declined 1.3 percent
and the MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> fell 2 percent.
(Reporting by Kristina Cooke, John Parry, Nick Olivari,
Christopher Kaufman and Fank Tang in New York and Naomi
Tajitsu, Jane Merriman and Alex Lawler in London and Sarah
Marsh in Frankfurt; Writing by Herbert Lash; Editing by Dan
Grebler)
