* MSCI world equity index down 0.15 percent at 309.85
* Bailout uncertainty, GE outlook downgrade weigh
* Money markets still stressed; dollar falls broadly
By Natsuko Waki
LONDON, Sept 25 (Reuters) - World stocks inched lower, the
dollar fell broadly and the interbank borrowing cost of dollars
remained high on Thursday as GE's outlook downgrade followed
investor anxiety over Washington's $700 billion bailout.
Investors are on tenterhooks as negotiation on the U.S.
government plan dragged on. President George W. Bush will press
for agreement on the rescue package to tackle the worst
financial crisis since the Great Depression in an emergency
meeting.
But even if the bailout is passed, investors were unsure how
that would prevent the U.S. economy from slowing further after
this month's turmoil led to the collapse of Lehman Brothers
collapse and the bailout of Fannie Mae, Freddie Mac and AIG.
Reinforcing concerns about the economy, General Electric cut
its third-quarter earnings forecasts in the face of a slowing
economy, citing dramatic developments in the financial markets.
"The economy is clearly slowing, so it's normal to see GE,
heavily involved in the economy as a whole, warning on its
outlook," said Philippe Gijsels, senior equity strategist at
Fortis Bank in Brussels.
"I fear that there will be more of the same in the
industrial sector in a not too distant future."
MSCI main world equity index <.MIWD00000PUS> fell 0.15
percent while U.S. stock futures <SPc1> pared early gains to
stand flat on the day.
The pan-European FTSEurofirst 300 index <> rose 0.4
percent, while shares in London <> and Asia <.MIAP0000PUS>
fell.
"There is still uncertainty about U.S. Treasury's bail out
phase. There needs to be quick action, it is important that
investors know what is going to be done about it as the
alternatives are too dire," said Bernard McAlinden, market
strategist at NCB Stockbrokers.
TENSIONS
As negotiation dragged on, tensions persisted in the money
market even as central banks injected billions of dollars of
liquidity to keep the interbank system afloat.
Three-month interbank dollar rates rose to 3.76875 percent
at the London fixing <LIBOR> from 3.47625 percent on Wednesday.
The premium on borrowing dollars in the wholesale market
over expected official interest rates hit a record high close to
200 basis points.
"It is quite remarkable that even though the money markets
have been seized up for nearly a fortnight, there has been no
further major failure of a financial institution -- despite
immense and practically unprecedented stresses," Morgan Stanley
said in a note to clients.
"This in itself might be seen as evidence of the system's
improved ability to withstand shocks, or at least of the central
banks' improved response, and may therefore eventually become a
source of renewed confidence."
The dollar <.DXY> fell 0.4 percent against a basket of major
currencies while the euro rose 0.3 percent to $1.4667 <EUR=> as
doubts emerged as to how to finance the rescue package and
concerns grew over the economy.
In their testimonies this week, Federal Reserve Chairman Ben
Bernanke and Treasury Secretary Henry Paulson warned of major
damage to the economy and the financial system if Congress did
not move quickly on the bailout.
"They had to talk (down the economy) in a way they haven't
done in the last couple of months to explain why they want to
spend all this money and that has put some pressure on the
dollar," said Lutz Karpowitz, FX strategist at Commerzbank.
The December Bund future <FGBLc1> fell 20 ticks.
Emerging sovereign spreads <11EMJ> tightened 3 basis points
while emerging stocks <.MSCIEF> fell 0.7 percent.
U.S. light crude <CLc1> fell 1.4 percent due to signs of
slumping demand in top consumer nations.
Gold <XAU=> ticked higher to $884.70 an ounce.
(Additional reporting by Blaise Robinson)
