* US stocks fall on worry over impact of budget proposal
* Record $1.75 trillion US budget deficit drags on bonds
* Oil jumps 5 pct on signs of rising US demand, OPEC moves
* Dollar falls vs euro but safe-haven appeal lingers
(Updates with close of U.S. markets)
By Herbert Lash
NEW YORK, Feb 26 (Reuters) - The cost of extra borrowing to
pay for a record $1.75 trillion U.S. budget deficit pushed U.S.
stocks and government debt prices down on Thursday, as oil
rallied for a third straight day on signs of rising demand.
U.S. gold futures ended lower for a fourth consecutive
session after U.S. President Barack Obama's budget offered the
promise of a better economy, denting bullion's appeal as a safe
haven.
The dollar fell against the euro, as investors expressed a
willingness to take on more risk, although a report showing a
plunge in new U.S. home sales in January added fresh evidence
of a sagging economy, which helped limit losses.
World stocks had rallied as governments made fresh moves to
support weak economies and banking systems, but Obama's plans
to expand healthcare coverage and curb costs by cutting
Medicare payments to private insurers pushed U.S. stocks down.
"They are certainly looking at providing healthcare across
the board for everyone," said Peter Jankovskis, director of
research at OakBrook Investments LLC in Lisle, Illinois.
"But to pay for that they are looking to obviously reduce
revenue for some of the healthcare agencies," he said.
Merck <MRK.N> and Johnson & Johnson <JNJ.N> were the No. 1
and No. 3 drags on the Dow with the budget proposal taking
direct aim at drugmakers and health insurers to help fund an
overhaul of the U.S. healthcare system.
The American Exchange Pharmaceutical Index <.DRG> fell 4.1
percent, while health insurers plunged. Humana Inc <HUM.N> fell
almost 20 percent, while Aetna Inc <AET.N> and UnitedHealth
Group Inc <UNH.N> fell by double digits. The S&P healthcare
index <.GSPA> fell 5.1 percent.
The Dow Jones industrial average <> closed down 88.81
points, or 1.22 percent, at 7,182.08. The Standard & Poor's 500
Index <.SPX> fell 12.07 points, or 1.58 percent, to 752.83. The
Nasdaq Composite Index <> shed 33.96 points, or 2.38
percent, to end at 1,391.47.
U.S. government debt prices fell as the prospect of a
record deficit -- the largest since World War Two as a
percentage of U.S. gross domestic product at 12.3 percent --
highlighted the pressing need to substantially ramp up bond
issuance.
The deteriorating budget outlook dragged benchmark 10-year
U.S. Treasury notes <US10YT=RR> down 17/32 in price to yield
2.99 percent. The 30-year U.S. Treasury bond <US30YT=RR> fell
47/32 in price to yield 3.67 percent. Bond yields move
inverselty to their prices.
"The Obama budget, which is a more honest appraisal of the
fiscal condition of the U.S. Treasury, reinforces that there
will be a boatload of new bond supply to contend with in the
years to come," said William Sullivan, chief economist of JVB
Financial Group in Boca Raton, Florida.
Although the housing data pointed to a poor U.S. economy,
investors believe that, with an administration taking the
initiative, the United States is more likely to recover faster
than other parts of the world, helping to bolster the dollar.
Against the yen, the dollar <JPY=> was up 0.74 percent at
98.39, while it barely fell against a basket of major
currencies. The U.S. Dollar Index <.DXY> was down 0.01 percent
at 87.832.
The euro <EUR=> was up 0.20 percent at $1.2732.
"Even with bad data, the U.S. dollar is still a safe-haven
play. If the U.S. were alone in the crisis, the euro would be
trading two-to-one to the dollar," said Dan Cook, senior market
analyst at IG Markets in Chicago. "But this is a global
crisis."
OIL JUMPS, GOLD SLIPS
U.S. oil prices jumped more than 6 percent to more than $45
a barrel on expectations the Organization of Petroleum
Exporting Countries will cut output again, and on signs of a
rebound in gasoline demand in the United States, the world's
top consumer.
The United Arab Emirates, an OPEC member, announced it was
cutting back supplies to Asia for April, adding to expectations
the producer group will throttle back production further when
it meets in March. []
U.S. crude for April delivery <CLc1> gained $2.72 to settle
at $45.22 a barrel. London Brent crude <LCOc1> settled up $2.22
at $46.51 a barrel.
Gold for April delivery <GCJ9> settled down $23.60, or 2.4
percent, at $942.60 an ounce in New York.
European shares closed higher on Thursday, ending a
four-day losing streak, as Royal Bank of Scotland <RBS.L> led a
banking sector encouraged by a new UK scheme to insure
nonperforming bank assets.
The FTSEurofirst 300 <> index of top European shares
closed 2.28 percent higher at 732.47 points after hitting a
six-year low on Wednesday.
The MSCI <.MIWD00000PUS> world stocks index was little
changed at 190.30, after being up for most of the day.
(Reporting by Leah Schurr, Vivianne Rodrigues and Pedro
Nicolaci da Costa in New York, Ian Chua and Kirsten Donovan in
London and Blaise Robinson in Paris; writing by Herbert Lash;
Editing by Jonathan Oatis)
