* MSCI world equity index down 1.2 percent at 304.88
* Woes at AIG deepen; Goldman Sachs results, Fed in focus
* O/n dollar rates surge; 25bps rate cut being priced in
By Natsuko Waki
LONDON, Sept 16 (Reuters) - Investors dumped equities and
oil as the financial meltdown spread on Tuesday, a day after
Lehman Brothers collapsed, driving the yen and government bonds
higher and unleashing a panic rush to secure short-term cash.
A day after Lehman filed for bankruptcy protection and Bank
of America <BAC.N> agreed to buy Merrill Lynch <MER.N>, concerns
about the global financial system deepened as fears grew
American International Group <AIG.N> could be the next financial
giant to tumble.
Third-quarter earnings results from Goldman Sachs <GS.N> and
an interest rate decision from the Federal Reserve <ECON> top
the day's agenda with a panic scramble in the interbank money
market threatening to trigger a fresh liquidity crunch.
The cost of borrowing dollars overnight rose to 10 percent
<USDOND=>, five times the benchmark Fed rate of 2 percent.
Interest rate futures <FEDWATCH> were pricing in a more than 90
percent chance the Fed would cut rates to 1.75 percent later.
Asian and European central banks flooded money markets with
cash as they sought to prevent the upheaval on Wall Street from
clogging the pipes of the global financial system.
"There's a smell of cordite in the air. It's like the day
after the explosion. People are still extremely nervous. They're
wondering what happens next," said Justin Urquhart Stewart,
investment director at Seven Investment Management.
"Investors are looking at what other companies have weak
balance sheets. Now we need a bit of leadership from the central
banks and the regulators."
The MSCI main world equity index <.MIWD00000PUS> fell 1.2
percent, its lowest since June 2006, on top of a 3.6 percent
tumble on Monday.
The FTSEurofirst 300 index <> fell 1.7 percent while
Asian stocks <.MIAPJ0000PUS> fell more than 4 percent.
AIG, thrown a $20 billion lifeline by New York state, came
under renewed pressure as ratings agencies downgraded the
insurer's debt.
PANIC SCRAMBLE IN MONEY MARKET
There were signs that the deepening financial crisis is
freezing up activity in the interbank money market. Overnight
dollar deposit rates <USDOND=> rose to 10 percent, according to
Reuters data, five times the benchmark Fed interest rates.
"The interbank market is dead because people are not willing
to take up positions or not willing to provide liquidity for
other banks," said a fixed income trader in London.
"Banks do have liquidity but they don't want to share with
other banks because they don't know what is going to happen
overnight. They don't want to come into the office and see who
is looking for Chapter 11."
The low-yielding yen extended its steep rise, with the
currency hitting a four-month high of 103.70 per dollar <JPY=>.
On Monday, the dollar suffered its biggest one-day drop against
the yen in nine years.
The dollar <.DXY> also fell against a basket of major
currencies.
Safe-haven government bonds surged around the world, with
the December bund future <FGBLc1> rising 76 ticks.
The broad sell-off in risky emerging assets, already under
pressure from slowing global growth, gained new momentum.
Emerging sovereign spreads <11EMJ> blew out to 395 basis points
over U.S. Treasuries, their widest level since May 2005.
Emerging stocks <.MSCIEF> fell 3.4 percent, their lowest
since October 2006.
U.S. light crude <CLc1> extended losses, falling 3.6 percent
to $92.32 a barrel as investors extended across-the-board
deleveraging, taking oil more than $50 off its record high set
in July.
Gold <XAU=> fell to $775.80 an ounce.
(Additional reporting by Brian Gorman and Ian Chua; Editing
by Ruth Pitchford)
