* MSCI world equity index up 0.5 pct at 297.67
* Global central banks unveil coordinated liquidity action
* Dollar overnight interbank rates fall; stocks rally
(Adds fresh detail, updated prices)
By Natsuko Waki
LONDON, Sept 18 (Reuters) - The cost of borrowing dollars
short-term tumbled and world stocks rallied on Thursday after
leading central banks unveiled concerted action to free up money
money markets jammed by banking sector strife.
A $21.7 billion deal by British bank Lloyds TSB <LLOY.L> to
buy HBOS <HBOS.L> to prevent another UK victim of the global
credit crisis also helped ease investor jitters after U.S.
stocks hit a three-year low on Wednesday.
Six of the world's top central banks announced a series of
measures to pump more than $180 billion in extra dollar funds
into global money markets which had virtually frozen up this
week after upheaval on Wall Street.
The U.S. Federal Reserve said it was extending currency swap
arrangements with other central banks by $180 billion to fund
the extra liquidity operations.
After the announcement, dollar overnight interbank rates
indicated on Reuters <USDOND=> slid to 2 percent, compared with
around 5.03 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 1.1 percent. MSCI main world equity index <.MIWD00000PUS>
rose 0.5 percent -- only the third time this month it has risen
on the day. The index earlier hit its lowest level since
November 2005, leaving it more than 11 percent down this month.
U.S. stock futures <SP2c> were pointing to a firmer open on
Wall Street later.
FUNDING TAP ON
In a sign of huge demand for sterling funds, banks bid more
than 200 billion pounds for the 66.21 billion pounds on offer in
a Bank of England open market operation.
And 61 banks bid for $101.68 billion in funds from the
European Central Bank, compared with the $40 billion that the
ECB had said it intended to allot.
"This is a global financial crisis so it is correct that we
are seeing a global response," said Thomas Mayer, economist at
Deutsche Bank.
"If a body dehydrates it falls over and if it gets worse it
can die. Likewise the financial system is starved of liquidity
right now so the central banks will have to keep providing it."
Interest rate futures <FEDWATCH> expect the Fed to cut
interest rates by a quarter point by end-October.
The low-yielding yen tumbled across the board as safe-haven
flows eased. The Japanese currency was down 0.2 percent at
104.59 per dollar <JPY=>.
The dollar came under pressure as coordinated liquidity
measures boosted dollar supplies. The U.S. currency fell 1.2
percent against a basket of currencies <.DXY> while it lost more
than 1 percent against the euro to $1.4459 <EUR=>.
The December Bund future <FGBLc1> fell 4 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.
Morgan Stanley <MS.N> was discussing a deal with U.S.
regional banking powerhouse Wachovia <WB.N>, according to a
source familiar with the matter, while CNBC said HSBC Holdings
<HSBA.L><0005.HK> and China's CITIC Group were eyeing Wall
Street's second-largest investment bank.
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 423 basis
points while emerging stocks <.MSCIEF> were down 0.8 percent.
In Russia, equity trading remained suspended 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> rose 0.3 percent while gold <XAU=>,
considered another safe-haven asset, rose slightly to $874.10 an
ounce after posting its biggest one-day gain on Wednesday.
(Editing by Mike Peacock)
