* MSCI world equity index at 200.23, down 0.42 pct
* Dollar heads for biggest weekly fall since Plaza Accord
* European stocks fall, oil pares recent gains
By Carolyn Cohn
LONDON, March 20 (Reuters) - The U.S. dollar steadied on
Friday but stayed on course for its biggest weekly fall in 24
years, while stocks dropped, on concern about the inflationary
effects of a Federal Reserve plan to buy government debt.
Analysts said the Fed's radical decision to buy $300 billion
of longer-term debt and vastly expand its balance sheet beyond
the current $2 trillion meant more and more U.S. dollars would
be created, straining demand.
"People have some concerns about the potential inflationary
effects of what the Federal Reserve has done. If everything is
implemented, then the balance sheet of the Federal Reserve will
have gone up by about $3,000 billion ($3 trillion)," said Luc
Van Hecka, chief economist at KBC Securities.
"That's a lot of money and it's not unusual that people tend
to see this as a threat to price stability somewhere in the
future."
The dollar steadied against a basket of currencies <.DXY>
overnight but was still down more than 5 percent on the week
after falling sharply on Wednesday and Thursday.
That put it on track for the steepest fall since the 1980s
Plaza Accord, when large economies agreed to a formal
depreciation of the dollar.
The euro has risen more than 6 percent against the dollar
<EUR=> this week, eyeing its sharpest weekly gain since
inception in 1999. It was trading at $1.3684 <EUR=> at 0842 GMT,
up 0.15 percent on the day and near two-month highs set on
Thursday.
A senior German lawmaker told Reuters that euro zone
countries have agreed a rescue plan to prevent members of the
currency bloc going bankrupt and will probably use it, with
Ireland and Greece the top candidates for aid, []
The dollar was steady against the yen at 94.46 <JPY=>, with
Tokyo markets shut for a holiday.
World stocks, as measured by MSCI's all-country index.
dropped 0.43 percent to 200.23 <.MIWD00000PUS>, after hitting
1-month highs in the previous session.
The pan-European FTSEurofirst 300 index <> of top
shares dropped 0.74 percent to 709.93, off recent three-week
highs. Friday is a "triple witching" day of futures and options
expiries, which typically adds to market volatility.
Stocks rose earlier this week as the Fed's plan to inject a
combined $1.15 trillion into the U.S. financial system improved
battered confidence in banks.
But the Fed's approach also creates uncertainties for
business and investors, mainly in the form of a weakening dollar
and prospects of surging inflation once the economy starts
recovering.
"Forward-looking inflation concerns are likely to play out
as a dollar negative," said strategists at UBS in a client note.
"The more aggressive stance taken by the Fed indicates that
the dollar will also lose out even against the other members of
the quantitative easing club -- sterling, yen and Swiss franc."
Euro zone government bond futures rose 10 ticks to 124.06
<FGBLc1>, after posting their largest one-day gain since 1996 on
Thursday, tracking Treasuries on the Fed debt announcement.
Prices for commodities rallied this week as the weakening
dollar made them cheaper for investors, while others looked for
a hedge against potential inflation.
Oil <CLc1> pared gains on Friday, dipping 21 cents to $51.42
a barrel, but gold <XAU=> rose to $961.80 an ounce.
(Additional reporting by Atul Prakash; editing by Patrick
Graham)
