(Updates with U.S. markets, changes byline, dateline; previous LONDON)
By Jennifer Ablan
NEW YORK, Feb 15 (Reuters) - World stock markets dropped and the dollar hit a one-and-a-half-year low against the euro on Friday, as worries deepened over the magnitude of the global economic slowdown following weak readings on the U.S. consumer and manufacturing fronts and further credit losses at banks.
The two-year Treasury note soared in price, with its yield briefly dipping to around 1.83 percent, the lowest level since May 2004, as investors shunned stocks and other riskier assets and sought shelter in relatively safe U.S. Treasuries.
Fears of a U.S. recession intensified on Friday after a widely followed gauge of U.S. consumer sentiment plunged to a 16-year low in February, to a level that has previously signaled recession, and as manufacturing in New York contracted this month for the first time in almost three years.
"Incoming economic data and news from Corporate America sustain indications and sentiment that we are definitely in a credit and housing recession," said James Kochan, fixed-income strategist at Wells Fargo Funds Management, in Menomonee Falls, Wisconsin.
"Stocks are feeling the heat from the seizing up and depressed activity in the credit market. The breadth of the difficulties in credit -- its size and scope -- dwarfs that of the Long-Term Capital Management crisis," he said, referring to the 1998 hedge fund collapse that forced a government-sponsored bailout.
The Dow Jones industrial average <
> was down 64.05 points, or 0.52 percent, at 12,312.93. The Standard & Poor's 500 Index <.SPX> was down 7.70 points, or 0.57 percent, at 1,341.16. The Nasdaq Composite Index < > was down 19.05 points, or 0.82 percent, at 2,313.49.Adding to anxiety on the consumer front, shares of Best Buy Co. <BBY.N>, the largest U.S. consumer electronics chain, dropped 4 percent to $43.96 after the company warned of a sudden drop-off in consumer traffic right after the holidays and cut its full-year earnings forecast.
Furthermore, consumer sentiment, measured by the Reuters/University of Michigan index, fell to 69.6 in early February from a reading of 78.4 in January. That is the lowest since the February 1992 reading of 68.8.
And the New York Federal Reserve's "Empire State" index tracking general business conditions tumbled nearly 21 points to a negative 11.7 reading, falling below the zero for the first time since May 2005.
But investors have been just as nervous about credit conditions.
Citigroup Inc. <C.N> has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, The Wall Street Journal reported. Citi shares dropped 2.4 percent, to $25.14.
In Europe, shares ended sharply lower on Friday as investors worried increasingly about the U.S. economy and the prospects of more write-downs at top banks due to the credit crisis.
The FTSEurofirst 300 index <
> ended down 1.96 percent at 1,309.34, with French bank Natixis <CNAT.PA> the top loser, tumbling 11 percent after it unveiled more than 1 billion euros in write-downs. UBS <UBSN.VX> fell 3.8 percent, taking its losses for the week to around 12 percent as Citigroup said in a note it expected more write-downs at the Swiss bank.In Japan, the Nikkei 225 Index <
> dropped 0.03 percent to end at 13,622.56. It was only in December that the Nikkei was trading over 15,250.00.MORE ANXIETY BOOSTS BONDS
In the U.S. government bond market, some parts of the yield curve benefited from the flight from risk-taking. The benchmark 10-year U.S. Treasury note <US10YT=RR> was up 9/32, with the yield at 3.7858 percent.
The 2-year U.S. Treasury note <US2YT=RR> was down 1/32, with the yield at 1.9072 percent, but not before dipping briefly to around 1.83 percent.
On the longer end of the Treasury cruve, the 30-year U.S. Treasury bond <US30YT=RR> was up 27/32, with the yield at 4.6 percent.
In currencies, the dollar was down against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> down 0.17 percent at 76.022 from a previous session close of 76.155.
But the euro <EUR=> had a good day again against the greenback, up 0.26 percent at $1.4675 from a previous session close of $1.4637.
Michael Woolfolk, senior FX strategist at The Bank of New York Mellon, said the poor U.S. economic outlook sets the euro up for a run at its record high just shy of $1.50.
Against the Japanese yen, the dollar <JPY=> was down 0.26 percent at 107.65 from a previous session close of 107.93.
In energy and commodities prices, U.S. light sweet crude oil <CLc1> fell 73 cents, or 0.76 percent, to $94.73 per barrel,, and spot gold prices <XAU=> fell $6.40, or 0.71 percent, to $901.40. The Reuters/Jefferies CRB Index <.CRB> was down 1.32 points, or 0.34 percent, at 383.07. (Additional reporting by John Parry, Kristina Cooke and Steven C. Johnson in New York and Natsuko Waki in London; Editing by Leslie Adler)