Subprime fallout heightens global rate doubts

By David McMahon and Mike Peacock

NEW YORK/LONDON (Reuters) - Reports of more damage from the teetering U.S. subprime mortgage sector hit global stock markets on Tuesday as central banks around the world said their outlooks for monetary policy had been thrown into doubt.

Speculation that more financial institutions face problems, evidence that German confidence has been weakened and data showing U.S. house prices slid by the most in at least two decades in the second quarter all quashed any hopes that the home loan crisis was easing.

Reflecting concern that the fallout from the subprime debacle is spreading, shares of State Street Corp. (STT.N), the world's biggest institutional money manager, fell 4.3 percent on worries about the company's $20 billion (10 billion pounds) plus in commitments to asset-backed commercial paper programs.

Meanwhile, Barclays (BARC.L) bank denied a report on Tuesday that it has several hundred million dollars (pounds) of exposure to failed debt vehicles structured by its investment banking arm.

"The credit story is back, with headlines about banks' exposure meaning that risk aversion is back to the fore," said Ian Stannard, senior FX strategist at BNP Paribas in London.

Minutes from the Federal Reserve policy meeting on August 7, released on Tuesday, showed the central bank recognized worsening financial market conditions might require a policy response.

The European Central Bank, Bank of Japan and Bank of Canada have all said market turmoil could affect their decisions on monetary policy. U.S. Federal Reserve Chairman Ben Bernanke will take the spotlight on Friday when he gives a speech on housing and monetary policy.

Investors are becoming increasingly confident that the Federal Reserve will cut interest rates at its next meeting in September, and that other central banks, including the ECB and BOJ, will be dissuaded from raising rates in the near term.