* MSCI world equity index up 0.15 pct at 266.28
* UK bank shares, sterling fall on government funding talk
* Money markets stressed despite global rate cut hopes
* Iceland pegs FX, takes control of Landsbanki
By Natsuko Waki
LONDON, Oct 7 (Reuters) - World stocks ticked higher on
Tuesday, a day after falling six percent to three-year lows, as
Australia's surprisingly large interest rate cut raised
speculation other countries may follow suit.
UK bank shares tumbled while sterling hit a 2-1/2 year low
against the dollar after the British government had held talks
with major banks over a possible multi-billion pound injection
of public money into the sector, according to a source.
Money markets remained logjammed with the cost of borrowing
dollars, euros and sterling for three months all rising in
London as banks remained reluctant to lend to each other.
Iceland has put local lender Landsbanki <LAIS.IC> in
receivership, pegged the crown to the euro and said Russia would
lent it 4 billion euros to help it fight the crisis.
Earlier, Australia cut interest rates by a full percentage
point to 6 percent, its biggest move in 16 years. This has
boosted speculation other major countries might follow suit,
especially as finance chiefs from Group of Seven rich countries
meet in Washington this weekend.
Now investors are betting the Bank of England will cut
interest rates by at least 50 basis points this week, after
measures by Washington and other European countries to contain
the credit crisis had little effect in calming frayed nerves.
"A concerted move by central banks to cut global rates would
be seen as an unmitigated positive ... the market's suspecting
that's the case," said Jeremy Batstone-Carr, head of private
client research at Charles Stanley.
"The macro backdrop is deteriorating and while the pace of
the deleveraging process has taken everyone by surprise by its
intensity the inevitable consequence is going to a longer and
deeper economic downturn."
In a volatile session, MSCI main world equity index
<.MIWD00000PUS> was up 0.15 percent, having lost more than 9
percent this month. The FTSEurofirst 300 index <> rose 0.5
percent after falling 7.8 percent to four-year lows on Tuesday.
"Policymakers urgently need to get some traction in their
policy initiatives, if disaster is to be avoided... Policymakers
cannot make any more mistakes: the clock is ticking, and it is
one minute to midnight," Barclays Wealth said in a client note.
U.S. stock futures <SPc1> rose 0.8 percent, indicating a
firmer open on Wall Street later.
PARALYSIS
In London, three-month dollar lending rates <LIBOR> rose to
4.32 percent from 4.28875 percent, while the cost of borrowing
euros and sterling also rose. This compares with market
expectations, shown on interest rate futures, that the Federal
Reserve would cut interest rates to 1.5 percent by January.
The low-yielding yen fell half a percent to 101.89 per
dollar <JPY=> and fell from a five-year peak against the
Australian dollar <AUDJPY=R> after Australia's interest rate
cut. The dollar <.DXY> fell a quarter percent against a basket
of major currencies. Sterling fell as low as $1.7322 <GBP=>.
The December Bund future <FGBLc1> fell 7 ticks as flows
seeking safer government bonds eased.
Emerging sovereign spreads <11EMJ> tightened 7 basis points
while emerging stocks <.MSCIEF> rose 0.1 percent, after falling
more than 10 percent on Tuesday.
U.S. light crude <CLc1> rose 3.4 percent to $90.77 a barrel,
while gold <XAU=> also gained to $880.70 an ounce.
(Additional reporting by Simon Falush; Editing by Victoria
Main)
