* Wall Street shares slump on financial sector worries
* ECB interest rate cut hits European stocks, euro
* Oil trades down 10 pct, below $34 per barrel
(Recasts; adds comment, updates prices; changes byline,
dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Jan 15 (Reuters) - Wall Street shares tumbled on
Thursday, while the U.S. dollar attracted safe-haven bids as
news Bank of America was pushing for more government aid
exacerbated fears about the health of the banking system.
Shares of Bank of America <BAC.N>, the largest U.S. bank,
dragged the Dow lower, with a drop of 21 percent to $8.06.
Citigroup <C.N> shares plunged as well, down 15 percent to
$3.85 a day before the bank was due to report its quarterly
results and new strategic direction.
Analysts said the need for more government aid in the
financial sector pointed to mounting credit losses as the
year-long U.S. recession deepens.
"I think it's tremendously disappointing that the banks
continue to flounder," said Carl Birkelbach, head of Birkelbach
Management in Chicago. "What's going on here is that the first
batch of the (financial rescue bailout) funds was supposed to
put out the fire, but now it looks like the fire is coming up
again.
In early afternoon trading, the Dow Jones industrial
average <> slid 2.2 percent percent, to 8,021.85. The
Standard & Poor's 500 Index <.SPX> dropped 2.7 percent, to
820.17. The Nasdaq Composite Index <> fell 1.8 percent to
1,464.17.
The dollar, meanwhile, rallied against the euro after the
European Central Bank cut interest rates by half a percentage
point, while the pan-European FTSEurofirst 300 <> ended
1.0 percent lower.
It was the fourth rate cut in just over three months for
the ECB, triggered by signs the financial crisis is biting hard
into the real economy and inflation threatens to slow to
further below the bank's 2 percent ceiling.
Overall, investors said they expect the ECB will slash
rates further following Thursday's rate move, despite mixed
signals from ECB president Jean-Claude Trichet over the timing
of the next cut.
"Markets are wondering: 'What is Trichet saying? Is he
living in a bubble?,'" asked Greg Salvaggio, vice president of
trading at Tempus Consulting in Washington.
"I think it tarnishes his credibility a bit. The British
and the U.S. have thrown the kitchen sink at the problem, but
it seems he's not willing to do what's necessary," he added.
The euro weakened 0.6 percent against the dollar to $1.3079
<EUR=>.
OIL DOWN, GLOBAL BONDS MIXED
Crude oil prices extended losses, making it easier for
central banks' to cut interest rates because of its benign
effect on inflation.
U.S. light crude for February delivery <CLc1> slid 10
percent to trade at $33.59 a barrel. Oil traded at $147 a
barrel last July, but has tumbled as the economic crisis has
sliced into global demand for energy.
World consumption is now projected to drop by more than
800,000 barrels per day this year.
In the debt market, U.S. Treasury prices mostly eased, with
investors reluctant to buy government debt as yields hovered
near 50-year lows.
Losses in U.S. Treasury debt prices were limited, as
weakness in stocks supported some safe-haven appeal for
Treasuries. Bonds had traded mostly higher in price through
much of the morning before shedding gains to turn negative
after stocks clawed back from session lows.
Benchmark 10-year Treasury notes <US10YT=RR> traded 3/32
lower in price for a yield of 2.22 percent, from 2.21 percent
late on Wednesday, while the two-year note <US2YT=RR> was 2/32
lower for a yield of 0.75 percent from 0.72 percent
European government bonds, on the other hand, rallied,
driving the benchmark German 10-year Bund yield to a historic
low as renewed worries about the banking sector sent investors
scurrying to the safety of government debt.
Two-year paper, which is most sensitive to shifts in
expectations on interest rates, yielded 1.550 percent
<EU2YT=RR>, up 4.2 basis points on the day but was still not
far from a euro lifetime low of 1.455 percent hit in the
previous session.
Ten-year Bund yields fell 5.9 basis points to 2.884 percent
<EU10YT=RR>, after earlier plumbing a record low of 2.856
percent.
(Additional reporting by Jeremy Gaunt and Ian Chua in London,
Ellis Mnyandu, Wanfeng Zhou and Chris Reese in New York,
editing by Gary Crosse)
