UK inflation jumps, German, Japan gloom deepens

By Mike Peacock

LONDON (Reuters) - The threat of stagflation loomed larger in Europe on Tuesday as British inflation hit a series high while German investor sentiment slid to a record low as the dollar charted a fresh trough versus the euro.

Asia was equally rattled, with bank shares tumbling on reports about regional exposure to troubled top U.S. mortgage lenders Freddie Mac (FRE.N: Quote, Profile, Research) and Fannie Mae (FNM.N: Quote, Profile, Research).

And the Bank of Japan, after leaving interest rates on hold at 0.5 percent, downgraded its growth forecasts, warning high energy costs were slowing the world's second largest economy.

The gloomy data and renewed doubts over the solidity of the world's banks, eclipsed Monday's optimism about a U.S. government plan to help out home financiers Fannie and Freddie.

The U.S. currency fell to $1.6038 to the euro, its lowest ever level.

Tuesday's figures encapsulated the conundrum facing central banks worldwide -- should they cut interest rates to support growth as the Federal Reserve has, or tighten policy to curb inflation, the route the European Central Bank has taken.

Many experts are now forecasting technical recessions at least, defined as two successive quarters of contraction.

The ZEW research institute's gauge of German economic sentiment fell to -63.9 in July from -52.4 in June, the lowest since the survey began.