Bear Stearns sale hits global shares

NEW YORK (Reuters) - Wall Street stocks moved lower on Monday after a fire sale of troubled Bear Stearns arranged by the U.S. Federal Reserve Bank slammed Europe and Asia with gaping losses but led to a milder reaction in the United States.

Global markets were driven by fear that the Fed's move to back JPMorgan (JPM.N) in taking over Bear Stearns reflected a widening of worldwide credit crisis that could engulf other banks and market participants.

In New York, however, equities were lifted by several rally attempts in morning trading and overall loses were half the level of other global markets.

"Much to everyone's shock," the Dow was not completely mired in negative territory, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

The need for a Fed bailout, however, kept trading cautious and jittery.

"We're in a position now where really the Fed is the only entity out there that can really help, to get the market back on track," said Kenny.

The dollar tumbled and investors piled into the safety of government debt following steep sell-offs of equity markets in Europe and Asia. U.S. stocks opened sharply lower but pared many losses and the Dow went in and out of positive territory.

Efforts by the U.S. Federal Reserve to restore battered investor confidence may have taken the edge off a grim mood in global markets. In an emergency move on Sunday the Fed cut a key lending rate and announced new measures to stabilize credit markets rocked by rising defaults on U.S. mortgage debt.

Reacting to signs of continuing instability. government debt prices surged in a flight to safety. U.S. And European short-term inter-bank lending rates jumped, while spreads of U.S. banks' credit default swaps widened, signalling growing fears of counter-party risk in the banking system.

Bids for cash instruments were so sharp that the yield on 3-month U.S. Treasury bills fell below 1 percent to levels not seen in 50 years.

Traders reported that money markets were near stand-still with banks increasingly wary of lending to each other after news that JPMorgan would buy Bear Stearns for just $2 a share.

Banking shares in the United States and Europe tumbled -- Lehman Brothers LEH.N was down 25 percent, UBS (UBSN.VX) fell 10 percent and Citigroup (C.N) shed 6.5 percent -- leading benchmark stock indexes lower.

The market had a positive view on the move by JPMoran, which rose 9.85 percent. Investors saw it as a rock-bottom price of $236 million -- a tiny fraction of the fifth-largest U.S. investment bank's market value a year ago.

U.S. stock indexes fell almost 2 percent shortly after opening and European shares fell more than 4 percent, following a sell-off in Asia, where Japan's leading indexes shed 3.7 percent.

A bounce in the Dow proved short-lived and the broader market remained in the red amid investor concerns that the global credit crisis may be spiraling out of control.

The Dow Jones industrial average .DJI dropped 114.39 points, or 0.96 percent, to 11,836.70. The Standard & Poor's 500 Index .SPX shed 23.44 points, or 1.82 percent, to 1,264.70. The Nasdaq Composite Index .IXIC tumbled 44.78 points, or 2.02 percent, to 2,167.71.

The financial sector tumbled, as Lehman Brothers LEH.N sank 23.9 to $29.86 and Citigroup dropped 7.3 percent to $18.35. The Standard & Poor's financial index .GSPF was down 3.6 percent.

The dollar hit new lows against the euro and a basket of six major currencies. Oil hit a new high of nearly $112 a barrel on the weaker dollar.

And investors dived into safe haven assets, lifting gold to more than $1,030 an ounce at one point and sending yields on short-dated euro zone debt below 3 percent for the first time in more than two years.

"The markets are in a complete state of panic and in such situations there is no such thing as valuation or value in any asset," said Michael Klawitter, FX strategist at Dresdner Kleinwort in Frankfurt.

In a shock move late on Sunday, the Fed lowered the discount rate it charges on direct loans to banks to 3.25 percent from 3.50 and implemented steps to provide cash to a wider range of financial firms, using tools last used in the Great Depression.

LIQUIDITY SQUEEZE

Investors are now nearly fully pricing in a 1 percentage point cut in the main federal funds rate at or before the Fed's policy meeting on Tuesday.

That would take U.S. rates down to just 2.0 percent.

There were also signs of continuing liquidity worries.

The Bank of England said it would offer 5 billion pounds of three-day funds later on Monday in an exceptional fine-tuning operation designed to bring overnight interest rates down.

Market strategists said there was a deep distrust between banks when it came to lending.

"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said David Keeble, head of rate strategy at Calyon.

Concern swirled that problems were not contained to Bear Stearns. Merrill Lynch MER.N fell 7.9 percent and Goldman Sachs (GS.N) declined 6.2 percent.

STOCKS, DOLLAR DOWN SHARPLY

European shares tumbled. The FTSEurofirst 300 .FTEU3 index of top European shares was down 3.4 percent, having pared losses from an earlier decline of 4.4 percent.

Earlier, Japanese stocks fell to about a 2-1/2 year closing low, dragged down by exporters worried about a rising yen.

The Nikkei average .N225 fell 3.7 percent or 454.09 points to end at 11,787.51, its lowest finish since August 8, 2005.

The broader TOPIX index .TOPX shed 3.7 percent or 43.58 points to 1,149.65, the lowest close since June 2005.

The dollar plunged across the board.

It slid as much as 3 percent in early Monday trading as low as 95.77 yen according to Reuters data JPY=, the lowest since 1995, and set fresh all-time lows at 0.9637 Swiss francs CHF=.

It later recovered to 96.91 yen and 0.9834 Swiss franc.

The euro EUR= soared as high as a new record $1.5904 before dropping back to $1.57533.

A record low dollar and an emergency rate cut by the Federal Reserve also fueled buying in gold, and traders expected choppy business ahead of a rate-setting decision by the U.S. central bank on Tuesday.

He active gold contract for April delivery GCJ8 in New York rose $12.70 to $1,012.20 an ounce after hitting a new record of $1,033.90.

Oil dropped from a record high as a part of wider commodity sell-off sparked by growing concern over the health of the world's largest economy.

U.S. crude CLc1 was trading at $106.87 by 1359 GMT, down $3.34 from the previous close. Earlier, it hit a new record of $111.80 and then fell to a session low of $105.11.

The gold contract for April delivery GCJ8 in New York was up $12.70 to $1,012.20 an ounce, after hitting a record $1,033.90.

(Reporting by Herbert Lash. Editing by Richard Satran)