* Markets unconvinced by Greece debt bailout
* Euro drops to 14-month low, losing over 1 percent vs USD
* Government bonds surge, German bund yields at record low
(Updates with comment, U.S. market close)
By Daniel Bases
NEW YORK, May 5 (Reuters) - The euro fell to a 14-month low
and world stocks slumped on Thursday as deadly protests against
austerity measures in Athens revived fears that Greece's
struggle to repay its debts could engulf other European
economies.
Moody's warned Portugal's debt could be downgraded but
markets recovered some ground but ended weaker.
German bond yields fell on investor fears that a massive EU
aid package for Greece would not be sufficient to maintain
confidence in the policies of other fiscally weak euro-zone
nations. U.S. Treasury prices drifted down from their highs but
were still up on the day as investors sought a haven.
The euro lost 1.25 percent to $1.2818 <EUR=>, its lowest
rate since mid-March 2009, after losing about 3.5 percent
against the greenback this week.
Skepticism that Greece can deliver on its promises of tough
austerity measures dominated the markets. Athens vowed it would
not retreat from its measures even if it incurs a heavy
political price.
"The focus right now is primarily on how this is going to
play out in Europe, how much damage is going to be done," said
Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, in
San Francisco.
"How this gets resolved will tell the rest of the euro
countries that are under pressure, 'Here are the parameters for
help.'"
German bund yields hit a record low, while the cost of
protecting Portuguese government debt against default hit a
record high after credit rating agency Moody's Investors
Service said Portugal was on review for a possible downgrade.
[]
U.S. stocks were weaker on the contagion fear, taking
little notice of a private sector report showing gains in the
U.S. labor market for the first time since January 2008.
[]
By the close of trade, the Dow Jones industrial average
<> fell 59.94 points, or 0.55 percent, to 10,866.83. The
Standard & Poor's 500 Index <.SPX> lost 7.73 points, or 0.66
percent, to 1,165.87. The Nasdaq Composite Index <>
dropped 21.96 points, or 0.91 percent, to 2,402.29.
The FTSEurofirst 300 <> index of leading European
shares pared losses slightly on strong results from market
bellwethers like Societe Generale <SOGN.PA>. The index however
closed down 0.95 percent, near a nine-week low.
DEADLY PROTESTS
In Athens, striking public sector workers challenged
Greece's bailout-for-austerity deal. Three people were killed,
including a pregnant woman, choked to death when protesters set
an Athens bank ablaze. []
Policymakers, including International Monetary Fund chief
Dominique Strauss-Kahn and the European Central Bank's Axel
Weber, warned of the dangers of contagion to other high-debt
euro zone nations. []
German Chancellor Angela Merkel put it in stark terms if
the rescue plan did not work.
"We're at a fork in the road," Merkel told German
lawmakers. "This is about nothing less than the future of
Europe, and with it the future of Germany in Europe."
[]
Portuguese credit default swap (CDS) prices surged to 407
basis points from 344 basis points, according to CDS monitor
CMA DataVision. The firm said the levels implied a default rate
of 29.6 percent.
Greece's CDS levels reached a record high of 850 basis
points from 764.5 basis points at the New York close on
Tuesday.
The two-year Schatz yield <EU2YT=RR> was spurred to a fresh
record low of 0.569 percent. The Schatz, a short-dated euro
zone government bond benchmark, was introduced in the early
1970s.
The 10-year Portuguese/German government bond yield spread
<PT10YT=TWEB><DE10YT=TWEB> widened to 310 basis points, a euro
lifetime gap.
The equivalent Spanish spread <ES10YT=TWEB> widened to 136
bps, also a euro lifetime gap.
Investors bought the government bonds on the Greece fear
factor, ignoring a report that said euro zone's economic growth
should be stronger in 2010 than previously thought.
[]
The price on benchmark 10-year Treasury notes <US10YT=RR>
was up 8/32 for a yield of 3.56 percent, down from 3.60 percent
late Tuesday.
"Fear is the dominant driver of this flight-to-quality,"
said Jim Barnes, fixed income portfolio manager at National
Penn Investors Trust Co. in Wyomissing, Pennsylvania.
World stocks as measured by MSCI <.MIWD00000PUS> fell 1.32
percent to their lowest since early March, while the more
volatile emerging equities index <.MSCIEF> lost 2.17 percent.
Asian markets also weakened. Shanghai's key index <>
slid as much as 2.0 percent to its lowest in seven months,
suffering from Beijing's weekend moves to tighten policy.
Japan's markets have been closed this week, and are
scheduled to reopen on Thursday.
Oil extended losses, falling $2.77, or 3.35 percent, to
settle at $79.97 per barrel <CLMO>, a day after its steepest
one-day percentage loss in three months, on rising inventories
and a firm dollar.
Safe-haven buying sent spot gold prices higher <XAU=>. The
precious metal gained $4.35 to $1,175.50 an ounce despite
strength in the greenback.
(Additional reporting by Leah Schnurr in New York, Carolyn
Cohn, Neal Armstrong, George Matlock, Kirsten Donovan in
London)
