* Asian stocks hit by global economy worries
* Government bonds gain ahead of U.S. house vote
* Dollar edges up as attention swings to ECB meeting
* Japan's Nikkei ends at three-year closing low
(Adds European outlook, updates Asian prices)
By Rafael Nam
HONG KONG, Oct 2 (Reuters) - Asian stocks fell and
investors sought the relative safety of government debt on
Thursday after the U.S. Senate's approval of a massive bank
bailout plan failed to dispel the deepening worries about the
global economy.
Doubts about whether the U.S. House of Representatives will
now approve the revised $700 billion rescue plan for the
financial system also weighed, after their unexpected rejection
of an initial package on Monday sent global markets reeling.
However, the dollar remained better bid against other major
currencies given expectations the financial crisis is taking a
toll on European financial firms, and more broadly on worldwide
growth, which could lead to interest rate cuts elsewhere.
Shares were set also to open lower in Europe, where
investors are bracing for comments on the financial crisis from
the European Central Bank. The ECB meets later in the day amid
expectations it will keep interest rates on hold at 4.25
percent.
"Even if the bill is passed, worries remain over the global
economic outlook so financial markets are unlikely to
stabilise," said Masamichi Adachi, a senior economist at
JPMorgan Securities in Japan.
"It's a completely different world now. All the things U.S.
authorities are doing now are simply aimed at preventing a
global meltdown. They might trigger a short rally in markets
but won't offer a fundamental solution," he said.
The MSCI index of Asia-Pacific stocks outside Japan
<.MIAPJ0000PUS> fell 1.2 percent, while Tokyo's Nikkei average
<> dropped 1.9 percent to end at its lowest close in three
years.
Stocks in South Korea, Hong Kong, Singapore and Taiwan fell
more than 1 percent each, while Australian shares <> fell
0.6 percent.
STEEP STOCK SLIDE
Asian stocks have dropped nearly 40 percent this year,
after a miserable September that saw shares drop 17 percent in
the biggest monthly decline since the financial crisis a decade
ago.
The inability to gain traction on Thursday came even after
the U.S. Senate voted 74 to 25 in favour of a revised bailout
package aimed at reinvigorating frozen worldwide credit markets
and interbank lending. []
The U.S. House of Representatives is expected to vote on
the bill on Friday, and investors appeared unwilling to bet on
approval yet despite the addition of sweeteners such as a tax
cuts and extended federal protection for bank deposits.
With appetite for risk eroded, investors opted for the
relative safety of government bonds. The U.S. Treasury 10-year
note <US10YT=RR> erased earlier losses to edge up, sending
yields down to 3.71 percent, compared to 3.74 percent late in
U.S. trade on Wednesday.
Gold <XAU=> also advanced, trading at $871.80 an ounce, up
from a notional U.S. close of $868.75 on Wednesday.
Continued signs of weakness in the U.S. economy --
including data on Wednesday showing U.S. factory activity
shrank in September to its lowest since the 2001 recession --
bode ill for a global economy that depends in good measure to
the largesse of the U.S. consumer.
"Market expectations for Asian growth was a bit too strong
at the start of the year. Asian currencies will weaken against
the dollar," said Kit Wei Zheng, an economist at Citigroup in
Singapore.
"The weakness in the rest of the world has not been priced
in and currencies will move to reflect that in the coming
months. It will be a story of the rest of the world weakening
rather than a rebound in the U.S. dollar."
DOLLAR FIRM
The dollar index <.DXY>, a gauge of performance against six
major currencies, rose 0.3 percent to 79.965. That was near a
one-year peak struck last month but off a high of 80.025 hit
before the Senate vote.
The euro dipped 0.4 percent to $1.3954 and was near a
one-year low of $1.3882 struck last month, amid expectations
the European Central Bank still has room to cut rates at some
point, which would erode the euro's yield advantage over the
dollar.
The currency has also slid as Europe is becoming a point of
focus for global investors as the credit crisis hits European
financial institutions such as Fortis, which was rescued by a
11 billion euro bailout on Sunday.
Oil <CLc1> was up 5 cents at $98.58, down from earlier
gains to as much as $100.37 as concerns remained over weakening
demand and growing supplies in the United States.
(Editing by Lincoln Feast)
