GLOBAL MARKETS-Global stocks in rout after AIG loss, dollar up

                                
 * Global stocks sink as AIG, HSBC unnerve investors
                                
 * Financial sector sentiment worsens on huge AIG loss
                                
 * Dollar index hits 3-yr high as investors seek safety
                                
 * Oil drops 10 pct, government debt up in safe haven bid
 (Adds close of European markets)
                                
 By Herbert Lash
                                
 NEW YORK, March 2 (Reuters) - Global stocks fell sharply on
Monday after a record $61.7 billion quarterly loss at AIG and
an $18.3 billion capital request at HSBC slammed world markets,
sending the dollar to 3-year highs and investors fleeing to the
safety of government debt.
                                
Insurer American International Group's <AIG.N> quarterly
loss, the largest in U.S. corporate history, renewed concerns
about the health of the financial sector. The worldwide
sell-off of risky assets came as oil prices dropped as much as
11 percent.
                                
 "AIG again raised the specter of 'What's the bottom on the
banking and finance sector?'" said Peter Jankovskis, director
of research at OakBrook Investments LLC in Lisle, Illinois.
                                
 Warren Simpson, managing director at Stephens Capital
Management in Little Rock, Arkansas said, "AIG is the stench
that has just overtaken the market, no doubt about it."
                                
 European shares closed down 5 percent after Asian stocks
slid about 4 percent. U.S. stocks fell more than 3 percent as
the Dow slid under the 7,000 mark for the the first time since
October 1997 and the S&P 500 was poised to slide below 700.
                                
 Investors also were unnerved by HSBC <HSBA.L>, Europe's
biggest bank, which launched a 12.5 billion pound rights issue
to shore up its balance sheet, and comments by investor Warren
Buffett, who said "the economy will be in shambles throughout
2009 ... and probably well beyond."
                                
 Shares of AIG <AIG.N>, which lost $99.29 billion for all of
2008, fell 14 percent to 48 cents a share as the company agreed
to a new bailout. Shares of HSBC fell 18.8 percent.
FTSEurofirst 300 <.FTEU3> ended a whisker away from its
lifetime low of 681.17 hit in March 2003.
                                
 Global stocks, as measured by MSCI's all-country world
equity index <.MIWD00000PUS>, fell more than 4 percent to
almost a six-year low.
                                
 All 30 components of the Dow were in the red as more than
one out of every six stocks on the New York Stock Exchange fell
to new 52-week lows. Declining shares outnumbered advancing
shares by more than 11 to 1.
                                
 Analysts said the news reaffirmed suspicion that more
turmoil lies ahead, spurring investors to sell stocks for
safer, dollar-denominated alternatives such as Treasuries.
                                
 The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
30/32 in price to yield at 2.91 percent, while the yield on the
the 10-year Bund <EU10YT=RR> fell as low as 3.014 percent.
                                
 "Market conditions are extremely difficult. Quite a lot of
investors have gone into the survival mode, just like the
companies. Capital preservation is the key at the moment," said
Philippe Gijsels, senior equity strategist at Fortis Bank in
Brussels.
                                
 About 1 p.m., the Dow Jones industrial average <.DJI> was
down 239.90 points, or 3.40 percent, at 6,823.03. The Standard
& Poor's 500 Index <.SPX> was down 27.64 points, or 3.76
percent, at 707.45. The Nasdaq Composite Index <.IXIC> was down
41.82 points, or 3.04 percent, at 1,336.02.
                                
 Energy stocks fell after crude prices <CLc1> tumbled below
$40 a barrel at one point as a deteriorating world economy
threatened to further cut fuel consumption.
                                
 In Europe, shares of BP <BP.L> fell 5.7 percent and Royal
Dutch Shell <RDSa.L> fell 6.2 percent, taking the most points
off of Britain's top index, the FTSE 100 <.FTSE>, after HSBC.
                                
 In U.S. markets, investors dumped shares of large
manufacturers, with 3M Co <MMM.N> off 5 percent Caterpillar Inc
<CAT.N> shares fell 9 percent.
                                
 European Union leaders' rejection of a mass bailout for
Eastern Europe pushed the euro below $1.26, as did a survey
showing euro zone manufacturers had their worst month in 12
years. For details, see [ID:nL1547427] and [ID:nL2213083].
                                
 The euro <EUR=> fell 0.76 percent at $1.2572 as the dollar
rose against a basket of major currencies, with the U.S. Dollar
Index <.DXY> up 0.79 percent at 88.862.
                                
 Against the yen, the dollar <JPY=> fell 0.27 percent at
97.26.
                                
 U.S. light sweet crude oil <CLc1> fell $4.88 to $39.88 a
barrel.
                                
 Gold dropped after rising earlier. Heavy losses in equity
markets triggered profit-taking after the metal failed to climb
further above $1,000 an ounce last week.
                                
 Spot gold prices <XAU=> fell 60 cents to $943.55 an ounce.
 (Reporting by Chuck Mikolajczak, Steven C. Johnson and John
Parry in New York and Joanne Frearson, Christopher Johnson and
Jan Harvey in London; writing by Herbert Lash; Editing by
Kenneth Barry)