(Adds close of U.S. markets)
* Major U.S., European stock indexes fall more than 1 pct
* Yen rises, sterling falls as risk aversion increases
* Credit jitters return, sparking bid for safe-haven bonds
By Herbert Lash
NEW YORK, June 2 (Reuters) - U.S. and European stocks fell
sharply on Monday and investors fled to the safety of bonds
after a British mortgage lender gave a bleak outlook on its
business and Standard & Poor's jolted three leading U.S.
securities firms with downgrades.
Euro zone and U.S. government bonds rose and yields fell --
the benchmark U.S. 10-year government note slipped below 4
percent -- as Bradford & Bingley's <BB.L> warning reminded
investors about the lingering impact of the credit crisis on
global economies. B&B shares tumbled 24 percent.
Standard & Poor's later cut its ratings on three major U.S.
securities firms -- Lehman Brothers Inc, Merrill Lynch & Co Inc
and Morgan Stanley -- pushing the Nasdaq down almost 2 percent
the Dow and S&P 500 Index almost as much, before the three
indices pared some of their losses.
The main European share index fell more than 1 percent.
The news was compounded by shake-ups at Wachovia Corp
<WB.N>, which ousted its chief executive, and plans by home
lender Washington Mutual <WM.N> to strip its CEO of the title
of chairman next month.
The yen posted its largest single-day gain against the
dollar in nine weeks and sterling also fell against Japan's
currency.
"We went into the session with very negative sentiment
coming from Europe due to a British mortgage lender," said
David Katz, chief investment officer at Matrix Asset Advisors
in New York.
"Then that was compounded by the management changes at
Wachovia and Washington Mutual," he added. "Obviously the last
leg down was the S&P action on the brokerage firms, which
increases the cost of capital."
The Dow Jones industrial average <> fell 134.83
points, or 1.07 percent, at 12,503.49. The Standard & Poor's
500 Index <.SPX> fell 14.67 points, or 1.05 percent, at
1,385.71. The Nasdaq Composite Index <> fell 31.13 points,
or 1.23 percent, at 2,491.53.
Investors fretted as S&P said the outlook on the large U.S.
financial services sector is now mostly negative. Lehman
<LEH.N> shares were hurt the most, falling 1.7 percent to
$33.83. Morgan Stanley <MS.N> stock was down 2.6 percent to
$43.10 and Merrill Lynch <MER.N> shares fell 3 percent to
$42.62.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
23/32 to yield 3.98 percent. The 30-year U.S. Treasury bond
<US30YT=RR> gained 22/32 to yield 4.68 percent.
Oil prices sagged before recovering, led higher by gains in
natural gas and refined products at the start of the U.S.
hurricane season.
Natural gas prices rallied up 4 percent as the start of the
U.S. hurricane season stirred concerns that storms could cut
oil and natural gas production and shut refineries along the
Gulf of Mexico.
U.S. crude <CLc1> settled up 41 cents at $127.76 a barrel,
off session lows of $125.22. London Brent <LCOc1> rose 24 cents
to $128.02.
Gold ended higher as the dollar softened against the euro
and as oil prices finished higher after rebounding from earlier
lows.
Spot gold <XAU=> rose as high as $897.10 an ounce and
traded at $891.25/892.65 an ounce by New York's last quote.
The dollar rose slightly against major currencies, with the
U.S. Dollar Index <.DXY> up 0.13 percent at 72.97.
Against the yen, the dollar <JPY=> fell 0.89 percent at
104.56, and the euro <EUR=> fell 0.13 percent at $1.5532.
In Europe, the FTSEurofirst 300 index <> of top
European shares fell 1.1 percent to close at 1,319.13 points.
B&B shares fell after the lender said it replaced its chief
executive and slashed the price of emergency fund-raising to
secure a lifeline from private equity firm TPG Capital.
TPG Capital agreed to take a 23 percent stake in B&B, which
said it expects the British mortgage market to deteriorate.
"It's been maybe a bit of a wake-up call that the financial
problems are not just all down to the U.S. subprime market and
we can't insulate ourselves from that. It's been a bit of a
slap around the face for investors," said IG Index chief
markets strategist David Jones.
Wachovia Corp <WB.N> shares fell more than 4 percent after
the bank announced the departure of its chief executive over
what it termed "disappointments," including the purchase of a
big mortgage lender at the height of the U.S. housing boom.
Financial stocks were among the worst-performing sectors.
Blue-chip banks JP Morgan Chase <JPM.N> fell 1.7 percent to
$42.27 and Bank of America <BAC.N> was off 1.6 percent to
$33.45. Wachovia fell to $22.79.
Adding to the gloom was a report from the Institute of
Supply Management showing U.S. factory activity contracted in
May for the fourth consecutive month, while prices paid by
factories surged to their highest since April 2004.
The yen, which tends to get bid in times of heightened risk
aversion as investors unwind trades financed by borrowing the
Japanese currency at low interest rates, rose against the
dollar.
The sour outlook from B&B renewed credit jitters and helped
a bid for safe-haven bonds stage a tentative bounce back from a
steep drop last week.
data
Japan's Nikkei share average <> rose 0.7 percent for
to its highest close since Jan. 9.
Technology stocks boosted Taiwan's TAIEX index <> 1.2
percent, while China Mobile <0941.HK> and CNOOC <0883.HK>,
China's No. 3 oil producer, led Hong Kong's Hang Seng index
<> up 1.3 percent, one of the region's largest gainers.
The MSCI index of shares in the Asia-Pacific region outside
Japan <.MIAPJ0000PUS> added 0.4 percet.
(Reporting by Richard Leong, Gertrude Chavez-Dreyfuss and
Frank Tang in New York and Amanda Cooper, Santosh Menon and Ian
Chua in London)
(Reporting by Herbert Lash. Editing by Richard Satran)
