* MSCI world equity index down 0.5 pct at 204.45
* European shares, U.S. stock futures rise; Asia lower
* Government bonds supported; yen hits 5-week high vs dollar
By Natsuko Waki
LONDON, Dec 2 (Reuters) - European shares and U.S. stock
futures rallied in a volatile session on Tuesday, while oil
recovered from 2-1/2 year lows as expectations grew for more
government and central bank steps to counter economic downturn.
A positive trading update from Tesco <TSCO.L> raised
expectations some retailers could withstand a consumer downturn,
while hopes for a U.S. auto industry bailout boosted General
Motors shares <GM.N> before the bell, helping broader markets.
"What you are likely to see is a snap-back rally after
yesterday's big sell-off," said Andre Bakhos, president of
Princeton Financial Group in Princeton, New Jersey.
MSCI world equity index <.MIWD00000PUS> fell 0.5 percent,
while FTSEurofirst 300 index of leading European shares <>
rose 0.7 percent, erasing earlier losses. Tesco <TSCO.L> rose
more than 9 percent.
U.S. stock futures rose 1.6 percent <SPc1>, pointing to a
firmer start on Wall Street.
Earlier, Australia cut interest rates by a
bigger-than-expected full percentage point while the Bank of
Japan expanded lending in an emergency meeting to ease a
year-end cash crunch.
Britain, the euro zone and New Zealand are also seen
lowering the cost of borrowing with speculation these central
banks could also surprise with aggressive rate cuts. Sweden is
also expected to cut rates at Wednesday's meeting, brought
forward by two weeks.
Executives of the big-three U.S. automakers, including
Chrysler, are due to make another plea for a $25 billion bailout
before Congress later on Tuesday as fears about possible
bankruptcy persist.
Shares also rebounding before the opening bell included
Citigroup <C.N> and Bank of America <BAC.N>, which were top
casualties in Monday's slide.
Emerging stocks <.MSCIEF> fell 2 percent.
U.S. crude oil <CLc1> rose 0.1 percent to $49.33 a barrel,
after hitting the 3-1/2 year low of $47.36 earlier.
YEN, BONDS FIRMER
Before mid-morning recovery, stocks were down after Monday's
confirmation that the United States had entered recession in
December 2007 and the Wall Street Journal's report that Goldman
Sachs <GS.N> is likely to announce a fourth-quarter net loss of
as much as $2 billion.
The low-yielding Japanese currency rose as high as 92.64 per
dollar <JPY=> -- only a couple of yen away from the level where
Group of Seven finance chiefs issued a warning about excessive
yen strength in October.
The benchmark 10-year euro zone government bond yield
<EU10YT=RR> fell to 3.09 percent, a low last seen in September
2005. The December bund futures <FGBLc1> rose 41 ticks.
The benchmark 10-year U.S. Treasury yield <US10YT=RR> stood
at 2.7169 percent, after falling to about 2.65 percent on Monday
-- its lowest in 50 years.
Governments around the world are borrowing heavily to
finance their fiscal stimulus packages, raising some concerns
about their ability to service the debt.
The cost of protecting U.S., UK and several major euro zone
governments' debt against default jumped to record highs,
according to credit data company CMA DataVision.
Five-year credit default swaps on UK government debt jumped
7 basis points to 106.4 bps, while the 10-year U.S. Treasury CDS
hit a record 66.4 bps.
Bond prices rose after Fed chairman Ben Bernanke signalled
the central bank could buy government and agency bonds in order
to influence yields and stimulate demand.
"A year with such horrific portfolio performance -- the
worst for both the long-only bond community and the hedge fund
crowd -- naturally encourages a more defensive posture going
into the final lap," Barclays said in a note to clients.
"When this conservative inclination coincides with a
technical balance-sheet driven liquidity deficit and unorthodox
central bank activity, Treasury yield curves may well continue
their bullish flattening trend into December 31."
The dollar <.DXY> was down 0.2 percent against a basket of
major currencies.
(Additional reporting by Brian Gorman; editing by Stephen
Nisbet)
