By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Financial markets began the month in a volatile mood on Monday with economic fear driving equities lower and gloom about Britain's downturn knocking sterling to a 12-year low.

The price of oil swung from being up well over $1.50 a barrel to registering losses of around $1.75 as Hurricane Gustav showed no signs of strengthening in its way towards the U.S. state of Lousiana.

Investors also were unhappy with Commerzbank's $14.5 billion (8 billion pounds) purchase of Dresdner Bank from Allianz.

The dollar was generally stronger and short-term euro zone government bond yields fell as investors bought into safe-haven plays. U.S. markets were closed for the Labour Day holiday.

Investors are mostly concerned at the moment with worries about the depth of a global economic slowdown.

This was clearest on Monday on currency markets, where Britain's pound fell to a 12-year low on a trade-weighted basis.

It was also down three-quarters of a percent at around $1.80

against the dollar, its lowest since April 2006 and a sharp comparison with more that $2 in July this year.