* MSCI world equity index down 1 percent at 329.65
* Weaker-than-expected Ifo, grim news from banks weigh
* Dollar hits 2008 peak, high-yielding currencies sold off
By Natsuko Waki
LONDON, Aug 26 (Reuters) - World stocks hit their lowest
level in almost two years on Tuesday as a worsening German
business mood and fresh concerns about financial firms triggered
a sell-off in risky assets, lifting the dollar to a 2008 high.
The Munich-based Ifo economic research institute said its
business climate index fell to 94.8 this month from 97.5 in
July, worse than the 97.1 consensus forecast, adding to growing
evidence that growth outside the United States is deteriorating
and accelerating the euro's tumble.
"The data should be considered dramatic," said Folker
Hellmeyer, economist at Bremer Landesbank.
"I expect the global slowdown will continue and affect
Germany significantly more than has been reflected in forecasts
up to now."
Investors had no shortage of grim news from the financial
sector, with JP Morgan <JPM.N> saying the market value of its
investments in preferred stock of U.S. mortgage lenders Fannie
Mae <FNM.N> and Freddie Mac <FRE.N> has halved this quarter.
Hopes for South Korean investment in Lehman Brothers <LEH.N>
took a hit after the country's top regulator voiced concern on
Monday about a state-run lender's interest in the bank.
U.S. regulators closed Columbian Bank and Trust on Friday,
the ninth U.S. bank to fail this year as the weakening economy
and falling home prices take their toll on financial firms.
While the epicentre of the one-year-old credit crisis lies
in the United States, investors eyed worsening growth elsewhere,
which benefited the dollar across the board at the expense of
high-yielding peers such as the Australian dollar.
"Problems in the U.S. financial market are leading to equity
market weakness which is the principal driver hitting the high-
yielding currencies," said Daragh Maher, deputy head of global
foreign exchange research at Calyon.
The FTSEurofirst 300 index <> fell 1.3 percent while
the MSCI main world equity index <.MIWD00000PUS> fell 1 percent
to its lowest since September 2006, bringing year-to-date losses
to more than 18 percent.
The September Bund future <FGBLU8> jumped to stand 26 ticks
higher on the day, following the weak Ifo survey.
DOLLAR RALLIES
The dollar <.DXY> rose to a 2008 high against a basket of
major currencies while it briefly hit a new six-month high
beyond $1.46 per euro <EUR=>. Sterling fell to a two-year low
below $1.84 <GBP=>.
The high-yielding Australian and New Zealand dollars fell
more than 1 percent against the U.S. currency.
The greenback has been garnering support from expectations
that growth outside the United States is deteriorating. The euro
zone and Japan have already moved halfway into recession after
their economies contracted in the second quarter while the UK
economy failed to grow at all in the same period.
A G20 finance official told Reuters on Monday that the
International Monetary Fund has trimmed its world economic
growth forecasts for this year and next, largely due to a marked
worsening in its outlook for the euro zone.
Emerging sovereign spreads <11EMJ> widened 1 basis point
while emerging stocks <.MSCIEF> fell 1.1 percent on the day.
U.S. light crude <CLc1> fell 0.3 percent to $114.73 a
barrel, but the downside was limited due to supply concerns from
tropical storm Gustav in the Caribbean.
Gold <XAU=> fell to $819.00 an ounce.
(Editing by Stephen Nisbet)
