* MSCI world equity index down 1.9 pct at 305.48
* B&B, Fortis bailouts shove European shares, euro lower
* TARP overshadowed as investors fret on banking contagion
By Veronica Brown
LONDON, Sept 29 (Reuters) - European shares fell heavily on
Monday as fallout from the credit crisis hit the region's
banking sector, forcing partial nationalisation of two banks and
leaving investors to ponder the impact of a U.S. bailout plan.
The euro and sterling fell in the wake of share prices
sliding, while safe-haven government bond prices rose.
Money markets remained frozen with banks refusing to lend to
one another for all but the shortest periods, prompting the
European Central Bank to offer additional funds.
The hard-fought U.S. proposal to establish a $700 billion
fund to buy illiquid securities will be sent for a Congressional
vote later on Monday after days of tense negotiations and
compromises.
But European worries threatened to overshadow the proposal
after the Belgian, Dutch and Luxembourg governments were forced
to rescue financial firm Fortis <FOR.BR> over the weekend to
prevent a domino-like spread of failure. []
In addition, the UK government said that lender Bradford &
Bingley's <BB.L> branch network will be sold to Spanish bank
Santander <SAN.MC> and the remainder of the group would be
nationalised. []
"The nationalisations have an incredibly negative read
across for the sector," said Mark Sartori, head of European
sales trading at Fox-Pitt, Kelton.
"The contagion is spreading to mainland Europe and
everyone's asking: who's next?" he added.
By 0830 GMT, MSCI main world equity index fell 1.9 percent
<.MIWD00000PUS>, a 1-1/2 week low. The FTSEurofirst 300 Index
was down 2.7 percent at 1073.97 <>, while a measure of
banking stocks tanked 5 percent to 267.76 <.SX7P>.
European shares followed a lead set in Asia overnight with
Japan's Nikkei share average <> posting a 1.3 percent
decline, erasing earlier gains.
The December U.S. S&P 500 future was down 2 percent <SPc1>,
reversing initial gains on news the plan was set for a vote in
the House of Representatives.
EURO FEELS THE HEAT
Currency markets also felt the pinch of banking sector
contagion, with the euro falling more 2 percent to a 10-day low
of $1.4310 <EUR=>. A fall of 2.1 percent or more would be the
biggest 1-day fall since Jan 2001, while a fall of 2.3 percent
or more would be the biggest since its launch in 1999.
In addition, sterling dropped almost 2 percent to $1.8085
<GBP=>.
"The crisis has taken on a more international complexion
with B&B and Fortis ... There is a worry whether there is the
ability or the willingness within Europe for a U.S.-style
response," Calyon senior currency strategist Daragh Maher said.
The dollar was well-bid elsewhere on hopes of smooth
legislative passing of the $700 billion proposal, rising 1.3
percent versus the Swiss franc <CHF=>. The high-yielding
Australian <AUD=> and New Zealand dollars <NZD=> fell 1.7 and
1.3 percent respectively.
December Bund futures <FGBLZ8> were 88 ticks higher at
114.68. Two-year bond yields <EU2YT=RR> fell to their lowest
since mid-April, while 10-year yields <EU10YT=RR> were just
under 16 basis points lower at 4.155 percent.
Two-year swap spreads, indicating the strains in the market,
rose as high as 120 basis points from 113 bps late on Friday.
In early London trade on Monday the interbank cost of
borrowing dollars for three months was indicated as high as 5.27
percent <USD3MD=>, the highest this year, according to Reuters
data.
The closely-watched TED spread, or the difference between
these market-based dollar rates and three-month U.S. government
borrowing rates, fluctuated in a wide range of around 280 to 440
basis points.
SAFETY VS RISK
Washington's bailout package, though unpopular with the
public and viewed sceptically by some analysts, is the biggest
effort yet by the U.S. government to ease the worst global
financial crisis since the Great Depression.
Yet it alone has not been enough to reverse a powerful move
by global investors to purge their portfolios of risk.
"The package will improve liquidity in the system. But I
don't think lenders are going to go out carte blanche and
provide new capital to the market in an aggressive way," said
Leigh Gardner, head of equities distribution for ABN AMRO in
Australia.
(Additional reporting by Kevin Plumberg in Hong Kong, Jessica
Mortimer and Joanne Frearson in London)
(Editing by Stephen Nisbet)
