World stocks fall but calm returns after sell off

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - World stocks fell to near three-year lows on Tuesday but fears of a major meltdown following historic Wall Street losses eased as European losses were muted.

The U.S. Congress's rejection of a bank rescue package tore nearly 9 percent off the broad S&P 500 on Monday but European shares and many Asian stock markets clawed back early losses on hopes the U.S. plan would eventually go through.

U.S. stock index futures also pointed to a higher opening, suggesting some belief that Monday's selloff was over done.

"It's certainly my working assumption that there (will be) some sort of agreement reached in the U.S. and based on that I would expect the market to recover quite strongly from yesterday's sell-off," said Darren Winder, equity strategist at Cazenove.

Angst over the battered financial sector continued, nonetheless, with Belgian-French financial services group Dexia getting a 6.4 billion euro (5 billion pound) capital boost from public shareholders to help it fight the global credit crisis.

Ireland also offered to guarantee all bank deposits for two years to improve banks' access to funds on international markets. It also guarantees covered bonds, senior debt and dated subordinated debt.

European stocks fell as much as 2 percent in early trading and Japan's Nikkei closed 4.12 percent lower after the deep losses on Wall Street in the wake of Congress's failure to agree a $700 billion (388 billion pound) plan to buy up toxic debt from the financial industry.

Globally, MSCI's main world stock index, a benchmark for many leading investors, was down 0.8 percent, adding to a 6.84 percent loss on Monday that saw the index's market capitalisation plunge $1.73 trillion.