* Euro falls on debt crisis spreading; ECB warning
* U.S. bonds rise on risk aversion
* Stocks plunge at close on U.S. probe on BP oil spill
By Manuela Badawy
NEW YORK, June 1 (Reuters) - The euro fell to a fresh
four-year on low Tuesday after the European Central Bank warned
the region's banks may face a new wave of losses, and U.S.
stocks plunged as the government launched a criminal probe into
BP's massive oil spill in the Gulf of Mexico.
U.S. Treasury bond prices rose as fears of hefty writedowns
by European banks sparked new worries about global economic
recovery and unleashed demand for safe-haven assets such as
government debt and gold.
Risky assets such as the euro and stocks rose earlier in
the day following better-than-expected U.S. construction and
manufacturing data. They gave up gains on fears the euro zone's
debt crisis would spread into its banking system.
The ECB cautioned on Monday that euro zone banks could face
a "second wave" of potential loan losses totaling 195 billion
euros ($239 billion) over the next 19 months due to the
financial crisis.
U.S. and UK financial markets were closed Monday for
national holidays.
"The ECB warning Monday set the stage for euro selling,"
said Matthew Strauss, senior currency strategist at RBC Capital
Markets in Toronto. "Markets remain jittery and overall risk
sentiment is bearish."
After May marked the most volatile month of trading since
the aftermath of Lehman Brothers' collapse in late 2008,
investors focused on concerns euro zone growth would slow as
the region struggles to rein in debt. That could, in turn,
reduce demand for exports from economies like China and slow
production there.
Concerns over another crisis in the banking sector were
compounded by data signaling slower manufacturing growth in
Europe and China. In the United States, a revival in the
factory sector due to overseas demand and inventory restocking
has helped lead an economic rebound over the past three
quarters.
"Treasuries and the dollar remain the safe haven because
the euro zone problem will not go away any time soon," said
Frank Cholly Sr., a senior market strategist at Lind Waldock in
Chicago.
BP tumbled 15 percent after its failed attempt to plug to
halt the Gulf of Mexico oil spill and news the United States
launched a criminal probe against the firm. []
The Dow Jones industrial average <> closed down 112.61
points, or 1.11 percent, at 10,024.02. The Standard & Poor's
500 Index <.SPX> fell 18.70 points, or 1.72 percent, at
1,070.71. The Nasdaq Composite Index <> lost 34.71 points,
or 1.54 percent, at 2,222.33.
Federal agencies, including the FBI, are participating in
the probe and "if we find evidence of illegal behavior, we will
be forceful in our response," U.S. Attorney General Eric Holder
told reporters after meeting with state and federal prosecutors
in New Orleans.
The energy sector was the worst performer in Wall Street,
with the S&P Energy index <.GSPE> down more than 2 percent
after BP Plc <BP.L> <BP.N> failed in its latest attempt to stem
the Gulf of Mexico oil spill. []
U.S. government bond prices rose with the benchmark 10-year
U.S. Treasury note <US10YT=RR> up 11/32, with the yield at
3.261 percent. The 2-year U.S. Treasury note <US2YT=RR> rose
1/32, with the yield at 0.7698 percent. The 30-year U.S.
Treasury bond <US30YT=RR> was up 20/32, with the yield at 4.18
percent.
Earlier in the day the Institute for Supply Management said
the U.S. manufacturing sector expanded for a tenth straight
month but at a slower pace than in April, which was the highest
in almost six years. Meanwhile employment rose to its best
level in six years, according to an industry report.
The Commerce Department said construction spending rose 2.7
percent, and investment in private construction surged 2.9
percent, the largest increase since July 2004. Also, the
Institute for Supply Management's manufacturing index expanded
more than expected in May.
The MSCI world equity index fell 1.28 percent. The index
has lost nearly 10 percent since April, putting it on track for
its biggest quarterly loss since March 2009.
The euro <EUR=> was down 0.51 percent at $1.2242, after
having fallen to a four-year low against the dollar at $1.2112,
its lowest since April 2006 as signs the euro zone's debt
crisis is spreading to its banking system. The dollar rose to
its highest in 15 months against a basket of major currencies.
Oil fell $1.81 or 2.35 percent to $72.16 a barrel and spot
gold <XAU=> rose $9.29, or 0.76 percent, to $1225.00 an ounce.
(Additional reporting by Vivianne Rodrigues and Richard
Leong; Editing by Andrew Hay)
