* Sterling falls after UK Q4 GDP contracted unexpectedly
* World stocks slip after rising for two straight sessions
* Weaker euro zone bonds hit after Spanish bank announcement
By Dominic Lau
LONDON, Jan 25 (Reuters) - Sterling and British shares fell
on Tuesday following a shock contraction in UK economic growth
in the last three months of 2010, while the euro retreated after
hitting a two-month high against the dollar.
The weak UK growth also fanned concerns over the global
economic recovery, hurting oil prices, while scepticism over the
cost of recapitalising Spanish banks weighed on euro zone
peripheral government bonds and Spain's stocks <>.
Britain's economy suffered a shock 0.5 percent contraction
in the last quarter of 2010, with unusually poor winter weather
accounting for only part of its first shrinkage in five
quarters. []
"The UK GDP may be a warning sign of what is to come in
Europe. Market participants may reassess the rate hike scenarios
which had led to a short squeeze," said Lee Hardman, currency
economist at Bank of Tokyo-Mitsubishi UFJ.
Sterling <GBP=D4> fell 1.5 percent to $1.5760, while
Britain's share benchmark <> lost 0.6 percent.
The euro <EUR=> edged lower to $1.3619, after hitting a
two-month high of $1.3688, according to electronic trading
platform EBS, in the run-up to the euro zone rescue fund's first
debt sale.
The European Financial Stability Facility, the 440 billion
euro fund being used to bail out Ireland, launched its debut
bond issue, with demand dwarfing the 5 billion euros on offer.
A source at the EFSF said it closed the order book with
demand at 43 billion euros, a sign of confidence in the
facility. []
The dollar <.DXY> was up 0.3 percent against a basket of
major currencies.
Debt from the euro zone's higher-yielding sovereigns has
also performed strongly in recent sessions on hopes the
stability facility will be strengthened.
But they came under pressure on Tuesday after a Spanish
government statement on the cost of recapitalising Spanish banks
was met with scepticism.
Yields on 10-year Portuguese government bonds over benchmark
German Bunds <PT10YT=TWEB> <DE10YT=TWEB> moved out by 12 basis
points to 382 bps, while those on 10-year Spanish government
bonds <ES10YT=TWEB> widened by 9 bps to 209 bps.
Spain's blue chip index <> lost 1.3 percent, with Banco
Santander <SAN.MC> down 2.6 percent.
Spain's weak savings banks have seven months to boost
capital through private investors or the state will partially
take them over, Economy Minister Elena Salgado said on Monday,
adding that their total capital requirements should not exceed
20 billion euros. []
"Peripherals are coming out a bit weaker this morning -- the
market seems to be a bit underwhelmed by the Spanish
announcement of 20 billion to recapitalise their cajas. That's
at the low end of what the market thinks they need," a trader
said.
STOCKS DOWN
Europe's FTSEurofirst 300 <> fell 0.5 percent, while
world stocks measured by MSCI All-Country World Index
<.MIWD00000PUS> eased 0.2 percent.
U.S. stock index futures <SPc1> <DJc1> <NDc1> slipped 0.3 to
0.6 percent, indicating a weak opening on Wall Street, ahead of
a two-day rate-setting meeting by the Federal Reserve.
Tokyo's Nikkei average <> rose for a second straight
session, up 1.2 percent on hopes of upbeat company earnings.
An improved economic growth outlook and expectations of
upbeat corporate earnings have buoyed equities recently.
The International Monetary Fund revised its world growth
forecast higher and said a package of U.S. tax cuts should give
a lift to a global economic recovery that had already begun to
gain speed late last year. []
Copper <CMCU3> lost 2.5 percent while <CLc1> fell for a
second straight day, down 1.7 percent to trade below $87 a
barrel.
(Additional reporting by William James, Tamawa Desai and
Anirban Nag in London; Editing by Ron Askew)
