(Updates prices, adds Merrill results, Wall Street outlook)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 17 (Reuters) - Huge losses from investment bank
Merrill Lynch undermined equities on Thursday, sending European
stocks into negative territory and setting Wall Street up for a
poor start.
The dollar also declined and investors were keenly awaiting
word on the U.S. economy from Federal Reserve Chairman Ben
Bernanke later in the session.
Merrill took a $14.1 billion write-down in the fourth
quarter on bad subprime mortgage bets plus other charges that
have forced the brokerage to sell pieces of the company to
foreign investors to raise capital.
It reported a net loss of $9.8 billion, or $12.01 a share,
the largest in the company's history.
Investors have been acutely worried about the continuing
impact of the subprime crisis on the financial sector.
"The real test is not these numbers but rather whether or
not this is the last of it," said one trader in London.
Bernanke, meanwhile, was to speak before the U.S. Congress'
House Budget Committee at 1500 GMT with investors keen to glean
more insight into the outlook for the world's largest economy.
The Fed chairman indicated last week that the Fed was ready
to cut interest rates aggressively to support growth.
This reinforced expectations for a half-point cut in the
benchmark federal funds rate from 4.25 percent at the Fed's
policy meeting on Jan. 29-30.
Markets are also wondering if there may be even more to
come, including a fiscal stimulus package from the White House.
"If (Bernanke) proves to be very supportive of some sort of
action it could possibly help stocks and the dollar as well,"
Bear Stearns said in a research note.
Economic worries have battered stocks so far this year,
sending MSCI's main world stock index <.MIWD00000PUS> down more
than 7 percent.
European stocks tried for gains early in the session but
then fell back. The pan-European FTSEurofirst 300 index <>
was down 0.2 percent. The index hit a 16-month low on Wednesday
on fears of a U.S. recession.
Earlier, Japan's benchmark Nikkei average rose 2.1 percent,
gaining for the first time in five sessions. It ended the
session up 2.1 percent at 13,783.45, and the broader TOPIX index
<> was up 2.2 percent at 1,330.44.
DOLLAR, BONDS
The euro rebounded from two-week lows against the dollar
after comments from ECB Governing Council member Yves Mersch
suggested the central bank was not looking to lower interest
rates yet, and with Merrill in the background.
Mersch reiterated that the European Central Bank discussed
two options, not three, at last Thursday's policy meeting,
ruling out thoughts of a rate cut.
A day earlier he said he did not rule out a downward
revision of euro zone growth forecasts for 2008, comments that
sent the euro reeling.
The euro bounced to a high of $1.47 <EUR=>, well off an
intra-day two-week low of $1.4589, before steadying at around
$1.4690, up about a quarter of a percent. It slid more than 1
percent on Wednesday.
Against the Japanese currency, the dollar slipped 0.7
percent to 106.72 yen <JPY=>.
Euro zone government bonds were mixed.
The interest rate-sensitive two-year Schatz yield <EU2YT=RR>
was down 1.7 basis points at 3.544 percent. The 10-year Bund
yield <EU10YT=RR> was up 1.5 basis points at 3.989.
(Editing by Ron Askew)
