* S&P UK credit outlook stirs U.S. debt fears
* Dollar slumps to 2009 low; bond yields jump, stocks fall
* Oil slides toward $61 after hitting 6-month peak
(Updates with U.S. market close; Geithner comment)
By Herbert Lash
NEW YORK, May 21 (Reuters) - Stocks sold off on Wall
Street, the dollar tumbled and U.S. government debt plunged on
Thursday on fears the growing U.S. deficit could lead to a
credit rating downgrade after Britain got a wake-up call.
The simultaneous decline in stocks, bonds and the dollar
marked a departure from a steady pattern in which investors
have taken refuge in bonds and the dollar when stocks have
fallen and vice versa.
Some investors read it as a sign of growing worry over the
amount of debt the U.S. government is issuing to counter the
recession.
Bill Gross, the co-chief investment officer of fixed-income
powerhouse Pacific Investment Management Co, was among those
who said a move by Standard & Poors to cut its outlook on
Britain's debt had set off fears for the United States.
U.S. Treasury 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 debt the
government is issuing to pay for its financial bailouts.
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.
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.
"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, also said Britain's outlook may in the long
term be seen as an early warning for other heavily-indebted
countries, particularly the United States.
An S&P spokesman declined to comment on the U.S. outlook
and noted the agency reaffirmed an AAA rating on the United
States in January.
U.S. Treasury Secretary Timothy Geithner made a reference
to U.S. debt when he addressed a congressional panel, saying
the United States would need to ratchet down its budget deficit
swiftly once growth was restored.
"We must get our fiscal house in order or risk having
government borrowing crowd out productive private investment,"
he said.
Geithner also said the U.S. administration has to make sure
its policies help retain confidence in the dollar's value.
The S&P warning further soured investors who already were
glum after a disappointing report on the American labor market
quashed 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 the reading was 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 rally in stocks since their fall 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.
(To read Reuters Global Investing Blog click on
http://blogs.reuters.com/globalinvesting. For the MacroScope
Blog click on http://blogs.reuters.com/macroscope. For Hedge
Fund Blog click on http://blogs.reuters.com/hedgehub)
(Reporting by Chuck Mikolajczak, Wanfeng Zhou and Chris Reese
in New York; Joanne Frearson, Ian Chua, Catherine Bosley, Jane
Merriman and Jan Harvey in London; writing by Herbert Lash;
editing by Eddie Evans)
