* MSCI world equity index steady at 296.27
* Global central banks unveil coordinated liquidity action
* Dollar overnight interbank rates fall; European stocks up
By Natsuko Waki
LONDON, Sept 18 (Reuters) - The cost of borrowing dollars
short-term fell on Thursday and European stocks turned higher,
halting a global equity selloff, after leading central banks
unveiled concerted action to ease acute money market stress.
A $21.7-billion deal by British bank Lloyds TSB <LLOY.L> to
buy HBOS <HBOS.L> to prevent another UK victim of the credit
crisis also helped ease investor jitters after U.S. stocks hit a
three-year low on Wednesday.
Six of the globe's top central banks announced a series of
measures to improve dollar liquidity in global money markets
that this week had virtually frozen up completely.
The U.S. Federal Reserve said it had authorised a colossal
$180 billion expansion of its temporary reciprocal currency
arrangements, or swap lines.
After the announcement, dollar overnight interbank rates
indicated on Reuters <USDOND=> slid to 2 percent, compared with
around 5.03 percent on Wednesday. Three-month interbank rates
remained more than 250 basis points above expected U.S. interest
rates.
"Any steps that help ease the liquidity problems,
particularly ahead of end-quarter, are welcome," said Sean
Callow, currency strategist at Westpac in Sydney.
"But markets know that central banks don't own a magic
bullet, otherwise they would have used it already. And we've
seen these sorts of steps before; it only addresses one of the
symptoms of the underlying crisis."
In a volatile session, the FTSEurofirst 300 index <>
rose 0.6 percent while MSCI main world equity index
<.MIWD00000PUS> was up 0.1 percent, recovering after hitting its
lowest level since November 2005.
"It is important to show that central banks among various
countries are cooperating. That makes a psychological
difference," said Tomoko Fujii, head of economics and strategy
for Japan at Bank of America in Tokyo.
"But when you think about the reasons behind the losses, it
is because housing prices are falling, and it is not as if such
losses are going to disappear and the economy is going to
improve tomorrow."
EXTREME FEAR
The dollar jumped 0.8 percent to 105.21 yen <JPY=> while it
rose 0.15 percent <.DXY> against a basket of major currencies.
The December Bund future <FGBLc1> was up 10 ticks, following
a rally in safe-haven U.S. government bonds on Wednesday.
This week started with the collapse of Lehman Brothers and
and a sale of Merrill Lynch <MER.N> to Bank of America <BAC.N>,
followed by the U.S. bail out of insurer AIG <AIG.N> and a
merger of two British banks.
Now, concerns are intensifying over the future of the two
remaining major U.S. investment banks. Goldman Sachs <GS.N>
suffered its biggest one-day drop ever on Wednesday while Morgan
Stanley <MS.N> had its worst day in at least 15 years.
Extreme investor risk aversion has triggered a scramble into
U.S. Treasuries, sending yields on one-month paper <US1MTR=RR>
to just 0.010 percent while three-month rates <US3MYT=RR> traded
as low as 0.020 percent, the lowest since at least 1954.
The Volatility Index <.VIX>, Wall Street's main barometer of
investor fear, closed at levels not seen since late 2002.
Emerging sovereign spreads <11EMJ> tightened to 425 basis
points while emerging stocks <.MSCIEF> fell 1.75 percent, a
fresh two-year low.
In Russia, equity trading remained suspended until further
notice following a precipitous sell-off this week while
exchanges restarted trading in repo and futures contracts,
including currency and interest rates.
U.S. light crude <CLc1> fell 1 percent while gold <XAU=>,
considered another safe-haven asset, rose slightly to $871.20
an ounce after posting its biggest one-day gain on Wednesday.
(Editing by Mike Peacock)
