* MSCI world equity index up 0.6 pct at 297.99
* Global central banks unveil coordinated liquidity action
* Dollar overnight interbank rates fall; stocks rally
(Adds LIBOR, updates prices)
By Natsuko Waki
LONDON, Sept 18 (Reuters) - The cost of borrowing dollars
short-term fell and world stocks rallied on Thursday after
leading central banks unveiled concerted action to free up money
markets jammed by banking sector strife.
A $21.7 billion deal by British bank Lloyds TSB <LLOY.L> to
buy HBOS <HBOS.L> to prevent another UK victim of the global
credit crisis also helped ease investor jitters after U.S.
stocks hit a three-year low on Wednesday.
Six of the world's top central banks announced a series of
measures to pump more than $180 billion in extra dollar funds
into global money markets which had virtually frozen up this
week after upheaval on Wall Street.
The U.S. Federal Reserve said it was extending currency swap
arrangements with other central banks by $180 billion to fund
the extra liquidity operations.
After the announcement, dollar overnight interbank rates in
London fell to 3.84375 percent <LIBOR> at the London fixing,
compared with around 5.03 percent on Wednesday.
However, tensions persisted. Three-month interbank rates
were 150 basis points above expected U.S. interest rates, its
highest premium since the credit crisis started in August 2007.
"The coordinated funding operation will be effective in
helping to relieve negative sentiment in the market to some
extent and is also a positive step in addressing the issue of
dollar funding shortages," said Joseph Kraft, head of capital
markets in Japan at Dresdner Kleinwort in Tokyo.
"But it is not a fundamental solution to the broader
financial problems, and does not ease worries weighing on market
sentiment such as the issue of individual financial institutions
and sharp declines in the stock markets."
In a volatile session, the FTSEurofirst 300 index <>
rose 1.2 percent. MSCI main world equity index <.MIWD00000PUS>
rose 0.6 percent -- only the third time this month it has risen
on the day. The index earlier hit its lowest level since
November 2005, leaving it more than 11 percent down this month.
U.S. stock futures <SPc2> were pointing to a firmer open on
Wall Street later.
FUNDING TAP ON
In a sign of huge demand for sterling funds, banks bid more
than 200 billion pounds for the 66.21 billion pounds on offer in
a Bank of England open market operation.
And 61 banks bid for $101.68 billion in funds from the
European Central Bank, compared with the $40 billion that the
ECB had said it intended to allot.
"This is a global financial crisis so it is correct that we
are seeing a global response," said Thomas Mayer, economist at
Deutsche Bank.
"If a body dehydrates it falls over and if it gets worse it
can die. Likewise the financial system is starved of liquidity
right now so the central banks will have to keep providing it."
Interest rate futures <FEDWATCH> expect the Fed to cut
interest rates by a quarter point by end-October.
The low-yielding yen tumbled across the board as safe-haven
flows eased. The Japanese currency was down 0.5 percent at
104.86 per dollar <JPY=>.
The dollar came under pressure as coordinated liquidity
measures boosted dollar supplies. The U.S. currency fell 0.8
percent against a basket of currencies <.DXY> while it lost more
than 1 percent against the euro to $1.4474 <EUR=>.
The December Bund future <FGBLc1> fell 10 ticks, following a
rally in safe-haven U.S. government bonds on Wednesday.
This week started with the collapse of Lehman Brothers and
and the sale of Merrill Lynch <MER.N> to Bank of America
<BAC.N>, followed by the U.S. bailout of insurer AIG <AIG.N> and
a merger of two British banks.
Now, concerns are intensifying over the future of the two
remaining major U.S. investment banks. Goldman Sachs <GS.N>
suffered its biggest one-day drop ever on Wednesday while Morgan
Stanley <MS.N> had its worst day in at least 15 years.
[]
Extreme investor risk aversion has triggered a scramble into
U.S. Treasuries, sending yields on one-month paper <US1MTR=RR>
on Wednesday to just 0.010 percent while three-month rates
<US3MYT=RR> traded as low as 0.020 percent, the lowest since at
least 1954.
The Volatility Index <.VIX>, Wall Street's main barometer of
investor fear, closed at levels not seen since late 2002.
Emerging sovereign spreads <11EMJ> tightened to 421 basis
points while emerging stocks <.MSCIEF> were down 1 percent.
In Russia, equity trading remained suspended following a
precipitous sell-off this week while exchanges restarted trading
in repo and futures contracts, including currency and interest
rates.
U.S. light crude <CLc1> rose 2.8 percent while gold <XAU=>,
considered another safe-haven asset, rose slightly to $880.65 an
ounce after posting its biggest one-day gain on Wednesday.
