* S&P downward revision of UK outlook stirs US debt fears
* Dollar slumps to 2009 low; bond yields jump, stocks fall
* Oil falls below $62 after rise to 6-month peak
(Updates with U.S. markets activity; changes dateline,
previous LONDON)
By Herbert Lash
NEW YORK, May 21 (Reuters) - Wall Street stocks sold off,
the dollar tumbled and U.S. government debt plunged on Thursday
on fears the growing U.S. deficit could lead to a credit
ratings downgrade after Britain received a wakeup call.
U.S. assets came under pressure, with yields on U.S.
Treasuries posting their biggest single-day jump in two weeks,
as investors speculated that the United States might be heading
closer to a the predicament of losing its AAA credit rating.
U.S. Treasuries debt fell sharply after the government said
it would sell $101 billion of new notes next week, adding to
worries whether investors can digest all the pending supply.
The announcement by Standard & Poors that it revised its
credit outlook on Britain to negative from stable reminded
investors that Britain was not alone in facing big fiscal
challenges, traders said.
Bill Gross, the co-chief investment officer of fixed-income
powerhouse Pacific Investment Management Co, said stocks, bonds
and the dollar were under severe selling pressure because of
fears about U.S. crediworthiness.
Investors fear that that United States is "going the way of
the UK -- losing AAA rating, which affects all financial assets
and the dollar," Gross told Reuters via e-mail.
The dollar plunged to its lowest level this year against
major currencies and gold rose above $950 an ounce to nearly a
two-month high as investors flocked to bullion as a safe
haven.
"People are asking, if the UK is having problems like this
then maybe U.S. sovereign debt is also not as solid," said
David Dietze, chief investment strategist at Point View
Financial Services in Summit, New Jersey.
Alan Ruskin, chief international strategist at RBS
Greenwich Capital, said the UK warning may in the long term be
seen as an early warning for other heavily-indebted countries,
and particularly, the United States.
The dollar plunged to its lowest level this year against a
currency basket and the euro neared a five-month high above
$1.39 as fear of widening U.S. government deficits soured
investors on dollar-denominated assets.
The euro gained 1 percent to trade at $1.3899 <EUR=>, after
hitting $1.3923 -- its highest level since early January --
while the dollar briefly dipped below 94 yen, a two-month low,
before clawing its way back to 94.25 yen <JPY=>, still down 0.6
percent.
The weakness in government debt came despite a host of
events that normally would be bullish for bonds, including
falling stocks, the Federal Reserve buying Treasuries and data
hinting the U.S. recession may be far from over.
The S&P warning threw more cold water on a markets that
already were glum after a disappointing report on the American
labor market quashed recent hopes that the U.S. economy was
poised for recovery.
The Philadelphia Federal Reserve Bank said its business
activity index improved to minus 22.6 in May versus minus 24.4
in April -- but still weaker than economists' expectations of
minus 18.0.
The Dow Jones industrial average <> closed down 129.91
points, or 1.54 percent, at 8,292.13. The Standard & Poor's 500
Index <.SPX> was down 15.14 points, or 1.68 percent, at 888.33.
The Nasdaq Composite Index <> was down 32.59 points, or
1.89 percent, at 1,695.25.
Peter Kenny, managing director at Knight Equity Markets in
Jersey City, New Jersey, said the U.S. labor data did not
justify the the rally in stocks since they fell to decade lows
in March.
"What it really is telling us is that we're in for a very
slow and deliberate turn before we can really start building a
solid foundation for the next move up in the market," he said.
Shares of big manufacturers dropped, and investors also
pummeled technology shares.
European shares fell, weighed by banks and commodities, as
S&P's potential UK credit cut added to worries sparked by news
on Wednesday that Federal Reserve policy-makers had cut their
U.S. growth forecasts over the next three years.
The pan-European FTSEurofirst 300 <> index of top
shares fell 2.1 percent to 857.52 points, breaking five
successive sessions of gains.
Benchmark euro zone government bond rallied, outperforming
UK gilts as well as higher yielding regional peers, after S&P's
credit rating outlook for Britain.
The U.S. 10-year Treasury notes <US10YT=RR> slid 1-17/32 in
price to yield 3.37 percent. The 30-year bond <US30YT=RR>
traded 3-7/32 lower to yield 4.33 percent.
Oil was dragged down from six-month highs as the lingering
signs of U.S. job market weakness stoked concerns about the
economy and fuel demand.
U.S. crude <CLc1> settled 99 cents lower at $61.05 a barrel
after hitting a six-month high over $62 on Wednesday. London
Brent <LCOc1> fell 66 cents to settle at $59.93 a barrel.
U.S. gold futures for June delivery <GCM9> settled up
$13.80 at $951.20 an ounce in New York.
Asian stocks slipped overnight on the Fed's lowered growth
forecasts. Japan's Nikkei average <> fell 0.9 percent as
the yen strengthened and MSCI's index of Asian shares outside
Japan <.MIAPJ0000PUS> eased 0.5 percent.
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Fund Blog click on http://blogs.reuters.com/hedgehub)
