* U.S. stocks drop sharply as bailout plan moves to vote
* U.S. Treasuries and dollar gain on flight to safety
* Central banks pump cash into paralyzed money markets
* Citigroup buying Wachovia assets
* Handful of European banks partially nationalized
(Updates with central bank cash injections, US markets, new
dateline and byline)
By Daniel Bases
NEW YORK, Sept 29 (Reuters) - Investors bought U.S.
Treasuries and dumped stocks globally in a scramble for safety
on Monday, amid a credit crisis that has U.S. lawmakers moving
quickly to vote on a $700 billion financial rescue plan while
central banks pumped more money into paralyzed money markets.
Gold prices surged in the search for safety while a handful
of banks in Europe were partially nationalized over the weekend
to protect them from failure.
To counteract the financial crisis that has spread
worldwide from last year's U.S. mortgage market meltdown, the
Federal Reserve announced a $330 billion expansion of
arrangements to boost U.S. dollar liquidity throughout the
global financial system which has become paralyzed by fear.
The euro fell nearly 2.0 percent against the U.S. dollar at
one point, but has since gained back some ground. Emerging
market currencies were pulled lower against the U.S. dollar in
a flight to safety.
The crisis has pushed Wachovia Bank <WB.N> to sell its
banking operations to Citigroup <C.N> in a deal brokered by the
Federal Deposit Insurance Corp., the FDIC said on Monday.
Morgan Stanley <MS.N> raised capital to shore up its
balance sheet with the sale of a 21 percent equity stake to
Japan's Mitsubishi UFJ Financial Group Inc (MUFG) <8306.T> for
$9 billion.
"With the news of Wachovia this morning, Washington Mutual
last week, it just seems a lot of these banks are getting
whacked," said Cleveland Rueckert, market analyst at Birinyi
Associates Inc in Stamford, Connecticut.
"People are apprehensive this morning that it (the U.S.
bailout plan) might not get passed and we're going to continue
to see bank failures," he added.
U.S. Treasury debt prices soared as cash poured into the
market looking for a safe haven. The benchmark 10-year Treasury
<US10YT=RR> was up more than 1-1/2 points in price, pushing the
yield down to 3.67 percent.
"The Treasury market was already rallying strong and has
spiked to new highs in the wake of this (Fed announcement), in
part related to the crisis nature of the actions," said John
Canavan, market analyst at research company Stone & McCarthy in
Princeton, New Jersey.
The picture was bloodier in U.S. stock markets where the
benchmark Standard & Poor's 500 stock index <.SPX> fell 37.70
points, or 3.11 percent, to 1,175.31.
The Dow Jones industrial average <> dropped 242.45
points, or 2.18 percent, to 10,900.68.
MSCI's main world equity index <.MIWD00000PUS> plunged 4.13
percent on Monday, putting on track for the biggest one-day
loss in at least 20 years. The index is at its lowest level
since Sept. 18.
MSCI's emerging markets stock index dropped 5.85 percent
<.MSCIEF> while yield spreads widened by 21 basis points to 400
basis points between U.S. Treasuries and emerging market
sovereign bonds <11EMJ>, indicating low risk appetite.
U.S. light crude oil futures <CLc1> fell 6.05 percent,
reflecting growing concerns over energy demand as the financial
crisis spread further to Europe.
Gold <XAU=> gained 1.80 percent to $894.20 an ounce.
FAILURES AND SAVIORS
The intensity of the credit crisis has increased in Europe,
sending the FTSEurofirst 300 index of top European shares down
4.82 percent to a 2-1/2 year low.
"A rescue plan worth 700 billion is simply not enough to
overcome the crisis for the foreseeable future. If anything,
all the real economy problems will escalate as a result in the
foreseeable future," said Carsten Klude, strategist at MM
Warburg.
The yield on the two-year benchmark European government
bond fell to a five month low, dropping more than 40 basis
points to as low as 3.424 percent <EU2YT=RR>.
The Belgian, Dutch and Luxembourg governments rescued
financial firm Fortis <FOR.BR> over the weekend to prevent a
domino-like spread of failure.
The UK government said lender Bradford & Bingley's <BB.L>
branch network would be sold to Spanish bank Santander <SAN.MC>
with the remainder of the group nationalized.
Moreover, Iceland's government bought a 75 percent stake to
take control of Glitnir <GLB.IC> after the bank's funding
position deteriorated in recent days, knocking the crown
currency to record lows against the euro.
German lender Hypo Real Estate <HRXG.DE> struck a
last-minute deal with the government and a consortium of banks
to resolve a refinancing squeeze.
"The nationalizations have an incredibly negative read
across 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?"
In the currency markets, the euro <EUR=> traded down 1.38
percent to $1.4411 <GBP=> while sterling lost 2.07 percent to
$1.8063, heading for its steepest one-day loss since mid-1993.
The dollar rose 0.60 percent against a basket of six major
currencies <.DXY>.
Highlighting escalating tensions in the money market, the
interbank cost of borrowing euros for three months rose to
all-time highs of 5.2250 percent at the London fixing <LIBOR>,
more than 100 basis points above expected interest rates.
(Additional reporting by Ellis Mnyandu, John Parry, Burton
Frierson in New York and Natsuko Waki, Naomi Tajitsu, and Sarah
Marsh in London;)
