* U.S. stocks sag as Fannie, Freddie plan overshadowed
* Dollar pares gains on concerns rescue plan isn't enough
* Government debt prices rally on flight-to-safety buying
* European stocks rise on merger activity
(Recasts with U.S. markets, adds byline; dateline previous
LONDON)
By Herbet Lash
NEW YORK, July 14 (Reuters) - Renewed fears about fallout
from the credit crisis on Monday overshadowed initial
enthusiasm over a rescue plan for the top two U.S. mortgage
finance companies, dragging down stocks as investors turned to
the safety of government bonds and gold.
Shares of Fannie Mae and Freddie Mac soared in European
markets after the U.S. government and the Federal Reserve said
on Sunday they would lend the two companies money and buy their
stock if needed to shore up the two pillars of the U.S. housing
market.
But the gains soon fizzled as analysts and investors noted
any direct government investment in Fannie Mae <FNM.N> and
Freddie Mac <FRE.N> would further dilute shares that lost more
than 40 percent of their value last week alone.
The seizure of mortgage lender IndyMac Bancorp Inc
<IMB.N>, late on Friday, the third largest bank failure in
U.S. history, added to investor unease about bank stability and
the future of the mortgage market.
The dollar clambered back from a near-record low against
the euro, and U.S. and euro-zone government debt rose amid
widespread concerns about global financial markets.
Freddie Mac passed its first test of investor confidence as
buyers flocked to its $3 billion sale of debt, but although the
routine auction went off without a hitch, investors remained
wary and shares in both companies swung wildly.
"Markets are in effect agreeing that the debt is money good
but the value of the equity is still in question," said Bret
Barker, portfolio manager, Metropolitan West Asset Management,
Los Angeles.
Before 1 p.m., the Dow Jones industrial average <> was
down 53.90 points, or 0.49 percent, at 11,046.64. The Standard
& Poor's 500 Index <.SPX> was down 9.89 points, or 0.80
percent, at 1,229.60. The Nasdaq Composite Index <> was
down 25.12 points, or 1.12 percent, at 2,213.96.
Freddie shares fell 18 percent to $6.35 and and Fannie
shares were off 6 percent to $9.59.
Shares of National City Corp <NCC.N> and Washington Mutual
<WM.N> plummeted more than 25 percent each amid fears about
bank stability and the future of the mortgage market. The rout
in banking stocks was widespread, pushing the KBW bank index
<.BKX> down more than 7 percent.
Regional banks tumbled. Fifth Third Bancorp <FITB.O> slid
more than 4 percent to $11.91 on the Nasdaq.
RELIEF RALLY IN EUROPE
The U.S. plan for Fannie and Freddie triggered a relief
rally in Europe, with the pan-European FTSEurofirst 300
climbing as much as 1.8 percent before paring gains as
investors focused anew on the wider credit crisis.
European shares rose in a session dominated by merger
activity in banking and beermakers, while the U.S. mortgage
rescue plan underpinned the broader equities market.
The FTSEurofirst 300 index <> closed 0.7 percent
higher at 1,133.95 points.
"There is a realization that there are still some
fundamental factors which are creating negative sentiment in
the global markets right now," said Barclays Stockbrokers
strategist Henk Potts.
"There is a bit of relief that it seems for the short-term
problems of those specific financial institutions a solution
has been put forward but there are still some massive, massive
hurdles to overcome before investors can start being confident
about the future," Potts said.
Banks were the top gainers, helped in part by the rescue
plan and by Spain's Santander <SAN.MC>, which said it would buy
British bank Alliance & Leicester <ALLL.L> for 1.3 billion
pounds ($2.6 billion) in a cash and stock deal.
A&L surged 53 percent, while Santander rose less than 0.1
percent.
In the latest mega deal in the fast-consolidating beer
industry, U.S. brewer Anheuser-Busch Cos Inc <BUD.N> accepted a
sweetened $52 billion takeover bid from Belgium-based InBev NV
<INTB.BR> to create the world's largest beermaker.
Anheuser shares rose 0.8 percent at $67.06, after surging
8.6 percent on Friday as news of a higher offer and talks
emerged. InBev was off 3.4 percent at 43 euros.
Relief that U.S. authorities are working to stem the global
financial crisis cheered investors, but it wasn't enough to
ease all their fears, investors said.
The safe-haven bond market had fallen earlier as worries
about the financial sector eased somewhat after the U.S. rescue
plan was unveiled.
"For the moment, the market is still looking to see whether
the U.S. rescue plan will be sufficient for Fannie Mae and
Freddie Mac, but the jury is still out on that," said Bob Maes,
fixed income strategist at KBC in Brussels.
Markets are volatile as investors await testimony on
Tuesday from Federal Reserve Chairman Ben Bernanke and a fair
amount of U.S. data, he said.
"So it's difficult to forecast how things will develop in
the coming days," Maes said.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
26/32 to yield 3.87 percent.The 30-year U.S. Treasury
bond<US30YT=RR> rose 44/32 to yield 4.46 percent.
The dollar rose against major currencies, with the U.S.
Dollar Index <.DXY> up 0.13 percent at 71.893. Against the yen,
the dollar <JPY=> was down 0.01 percent at 106.20.
The euro <EUR=> fell 0.10 percent at $1.5924.
Oil eased to near $144 a barrel on Monday as a U.S. plan to
restore confidence came under pressure amid nagging concerns
about the credit markets.
U.S. light sweet crude oil <CLc1> fell 15 cents to $144.93
per barrel.
U.S. gold futures rise above $970 an ounce, trading at
their highest in nearly four months as funds poured into the
market amid financial market jitters.
Spot gold prices <XAU=> rose $9.40 to $973.10.
Overnight, the U.S. dollar rose after the U.S. rescue plan
was unveiled, but Asian shares dropped on the view that the
global credit crisis is worse than previously thought.
Japan's Nikkei share average <> closed 0.2 percent
lower and Hong Kong's Hang Seng index <> fell 1.3 percent.
Shares in Asia-Pacific companies outside of Japan fell 1.1
percent, according to an MSCI index <.MIAPJ0000PUS>.
(Reporting by Ellis Mnyandu, Nick Olivari, Gertrude
Chavez-Dreyfuss, Ellen Freilich and Frank Tang in New York, and
Amanda Cooper, Ian Chua and Santosh Menonin London; Writing by
Herbert Lash; Editing by Leslie Adler)
