* MSCI world equity index down 1.9 pct at 265.76
* Sharp falls in China, Japan spill over to Europe
* Oil tumbles; dollar, government bonds firmer
By Natsuko Waki
LONDON, Aug 17 (Reuters) - World stocks fell by nearly 2
percent on Monday, led by sharp drops in Asia, while government
bonds and the dollar rose as doubts about the strength of a
global economic recovery triggered a risk asset sell-off.
The benchmark MSCI world equity index <.MIWD00000PUS> headed
for its biggest one-day loss since early July. Chinese stocks
<> hit a two-month low and posted their biggest daily drop
in 9 months, having rallied more than 85 percent since January.
Friday's data showing a further deterioration in U.S.
consumer confidence overwhelmed a report on Monday that Japan
became the third G7 country after Germany and France to pull out
of recession.
"There is now a realisation that coming out of a recession
is one thing, but building a recovery is another," said Justin
Urquhart Stewart, director at Seven Investment Management.
"We are now down to how companies are going to grow. The
growth we have seen out of Japan as well as Europe looks like it
has been primarily based on government stimulation ... The
question is, is this sustainable?"
MSCI world equity index <.MIWD00000PUS> was down 1.9
percent, having hit a 10-month high on Friday. The FTSEurofirst
300 index <> lost 2 percent.
U.S. stock futures <SPc1> were down more than 2 percent,
pointing to a weaker open on Wall Street later. Friday's data
from the Reuters/University of Michigan surveys showed consumer
confidence fell more than expected in early August, hitting its
lowest level since March.
"We seem to have been a bit spooked with the U.S. consumer
confidence figures and that has followed through into the Far
East," said David Morrison, market strategist at GFT Global.
"It all just feels like we're running out of steam. We've
had a great summer so far... It might be the start of a
realisation that we have really overcooked this."
Emerging stocks <.MSCIEF> fell 3.2 percent.
CHINA FEARS
Shanghai stocks <> fell 5.8 percent to their lowest
close in two months on worries about added share supplies and
commodity price declines. The index is down more than 17 percent
from its 14-month high hit a fortnight ago.
According to Thomson Reuters data, the price to earnings
ratio -- a valuations measure -- on Shanghai stocks has nearly
doubled to 28 times since the start of the year following the
rally. This compares with the P/E ratio of 15.7 times on the S&P
500 index <.SPX>.
U.S. crude oil <CLc1> fell 2.5 percent to a two-week low of
$65.80 a barrel.
The September Bund futures <FGBLc1> rose 30 ticks to a
two-week high. In Britain, the yield on two-year gilts hit a new
all-time low of 0.852 percent <GB2YT=RR> as prices surged.
The dollar <.DXY> rose 0.7 percent against a basket of major
currencies while the yen was 0.15 percent firmer at 94.64 per
dollar.
"A creeping rise in risk aversion could provide the dollar
with a temporary boost," Citi said in a note to clients.
"A more decisive market correction could be triggered by a
resumption of flows into the market and/or evidence that China
lacks control over its overheating economy and its frothy
financial markets. We expect the yen to remain well bid in this
context."
(Additional reporting by Joanne Frearson and Harpreet Bhal;
editing by Stephen Nisbet)
