* MSCI world equity index down 0.8 percent at 202.06
* Sterling hits 7-1/2 year lows; Barclays down 20 pct
* Government bonds firmer; oil regains poise
By Natsuko Waki
LONDON, Jan 21 (Reuters) - Sterling hit fresh 7-1/2 year
lows against the dollar and European shares tumbled again on
Wednesday as fears intensified about the banking sector,
knocking Barclays <BARC.L> shares down more than 20 percent.
Investors rushed to buy government bonds, sending two-year
euro zone government bond yields to a record low.
News that global miner BHP Billiton would cut 6,000 jobs and
close a giant mine in Australia highlighted concerns that the
credit crunch, well into its second year, is savaging the real
economy and squeezing global demand for commodities.
Banking shares have been under pressure even as Britain
launched a fresh bailout package this week to help its troubled
banks.
"There's despair with regard to what's happening to the
banking sector," Keith Bowman, analyst at Hargreaves Lansdown.
"With the huge threat of nationalisation on the horizon it's
difficult for people to see a reason to be buying (banks), and
on that basis it's one-way traffic in terms of trade."
MSCI world equity index <.MIWD00000PUS> fell 0.8 percent,
losing for the third consecutive day. The FTSEurofirst 300 index
of leading European shares <> dropped 1.6 percent.
Shares in Barclays <BARC.L> fell more than 20 percent to
their lowest level since 1985.
U.S. stock futures were up around 0.6 percent <SPc1>,
pointing to a firmer open on Wall Street a day after it
registered a record Inauguration Day drop as Barack Obama took
office as the new U.S. president.
Emerging stocks <.MSCIEF> fell 1.4 percent.
STERLING SINKS
Sterling fell as low as $1.3716 <GBP=>. On top of banking
concerns, investors are worried the Bank of England will cut UK
interest rates -- already at a record low of 1.5 percent -- even
further to boost the economy.
Investors expect the BoE to cut again next month, by half a
point, which would further dampen sterling's yield premium. But
it could go much further.
Bank of England Governor Mervyn King said late on Tuesday
that quantitative easing measures were now under consideration.
Such unconventional measures would take the form of the
central bank buying a range of financial assets, thereby
boosting the money supply and increasing available credit to
companies, he said.
With the latest decline, sterling has lost around 7 percent
against the dollar this week.
"The currency pair is neutral to slightly undervalued on
most fundamental measures. As such, at current levels the
currency pair is now at extreme and favourable levels for
corporates who need to hedge medium to long term earnings," Bank
of Scotland Treasury said in a note to clients.
The cost of insuring UK sovereign debt against default,
shown on five-year Credit Default Swaps, widened to 143 basis
points <GBGV5YEUAC=R> from below 100 two weeks earlier.
March Bund futures <FGBLc1> rose 44 ticks. The two-year euro
zone government bond yield hit a historic low of 1.436 percent
<EU2YT=RR>.
The premium that investors demand for buying less liquid
European government debt over benchmark German bonds hit record
highs partly due to fears about possible sovereign credit
ratings downgrades.
The dollar <.DXY> fell 0.3 percent against a basket of major
currencies. U.S. crude oil <CLc1> reversed earlier losses,
gaining 1.3 percent at $41.36 a barrel.
(Additional reporting by Rebekah Curtis; editing by Stephen
Nisbet)
