* MSCI world stock index off 0.6 pc after six-month high
* Sterling tumbles after S&P cuts UK ratings outlook
* Stocks slip, dollar hits lowest in almost 5 mths after Fed
By Natsuko Waki
LONDON, May 21 (Reuters) - Sterling tumbled from an earlier
six-month peak and London stocks fell on Thursday after Standard
& Poor's revised down its UK ratings outlook, while world stocks
slipped after the Federal Reserve cut the U.S. economic outlook.
Wall Street also looked set for a negative start.
Group of Seven member Britain, whose economy is in recession
after the credit crisis hit its financial sector, has been
boosting government borrowing to finance its massive fiscal
easing programme.
Data released minutes after ratings agency S&P's move showed
domestic public borrowing hit a record high for the month of
April.
S&P lowered its outlook on Britain to negative from stable,
because the UK's government debt burden may approach 100 percent
of gross domestic product, although it affirmed the current
triple-A ratings.
"This is a reality check for the UK government. They are not
the U.S," said Kenneth Broux, economist at Lloyds TSB Corporate
Markets.
"(The debt to GDP ratio) is set to rise sharply. Whether we
get to 100 percent depends on the bank liabilities. But
obviously S&P think the recession means more red ink and the
latest borrowing estimates are unsustainable."
Competitor ratings agencies Moody's and Fitch Ratings left
their outlooks unchanged.
Sterling fell to 88.69 pence per euro <EURGBP=> after
hitting its highest level against the euro in 3-1/2 months of
87.23 per euro.
Against the dollar, it was trading at $1.5656 <GBP=>, down
sharply from an earlier six-month peak above $1.58.
The cost of protecting UK government debt against default
rose 2.3 basis points at one stage to 75.8 bps after the S&P
move, according to CMA DataVision.
EQUITY SETBACK
World stocks slipped from this week's six-month peak and the
dollar fell to its lowest in almost five months after the
Federal Reserve lowered its forecast of U.S. economic growth for
the next three years.
Minutes from its April meeting showed the Fed projected the
world's biggest economy to contract by up to two percent this
year with the unemployment rate rising to as high as 9.6
percent.
They also showed Fed policymakers had considered buying more
securities to spur recovery -- a move which would inject more
dollars into the market.
Wednesday's disappointing 2009 outlook from Hewlett-Packard
<HPQ.N>, the world's biggest PC maker, also fanned concerns
about corporate profits in a slowing economy.
"There are concerns finally coming through about where the
underlying growth is going to come from," said Justin Urquhart
Stewart, investment director at Seven Investment Management.
"We need a growing level of demand. There's a certain amount
of restocking happening, and unfortunately the market has been
taking that as a sign of a recovery, which it is not."
MSCI world equity index <.MIWD00000PUS> fell 0.6 percent
after surging to levels last seen in early November on
Wednesday.
The FTSEurofirst 300 index <> fell 1.5 percent while
emerging stocks <.MSCIEF> fell 1.2 percent.
The setback comes after an almost uninterrupted rally from
mid-March pushed the benchmark MSCI index up 42 percent.
U.S. crude oil <CLc1> -- whose prices are closely correlated
with growth expectations -- fell 2.2 percent to $60.66 a barrel
after hitting a six-month peak above $62 on Wednesday.
Despite the fall in risky assets, there have been signs the
worst may be over for the global economy.
The euro zone's services and manufacturing sectors
contracted less than expected in May as firms saw the pace of
decline in new orders ease. Markit's euro zone flash services
purchasing managers' index rose to 44.7 in May from 43.8 last
month, beating the consensus estimate of 44.5.
In a further sign of easing tensions in money markets,
short-term dollar funding costs dropped further to fresh lows in
Asia. In Singapore, 3-month dollar costs <SIUSDD=ABSG> fell 4
basis points from Wednesday to 0.70917 percent -- nearly half
the levels in March.
On Wednesday, the Volatility Index -- Wall Street's fear
gauge -- fell as low as 26.57 <.VIX> at one point, hitting its
lowest level since Sept. 15, when Lehman Brothers filed for
bankruptcy.
The June bund futures <FGBLc1> was steady on the day.
The dollar <.DXY> was down 0.1 percent against a basket of
major currencies, having hit its lowest level since early
January earlier.
(Additional reporting by Sitaraman Shankar and Atul Prakash;
editing by Chris Pizzey)
