GLOBAL MARKETS-Stocks slip on banking concerns, dollar gainss

                                
   * U.S. stocks slump as fear of more bank failures grows
                                
 * Dollar rises versus yen after strong U.S. factory data
                                
 * Oil slips below $69 a barrel on equities, strong dollar
                                
 * Bonds fall after U.S. ISM data boosts recovery hopes
 (Updates with U.S. markets activity, changes byline, dateline;
previous LONDON)
                                
 By Herbert Lash
                                
 NEW YORK, Sept 1 (Reuters) - U.S. stocks fell sharply on
Tuesday as growing concerns about the U.S. banking system and
over whether a recent rally in equity markets is warranted
drove investors to the relative safety of bonds and the
dollar.
                                
 Oil prices fell as the economic concerns outweighed
surprisingly bullish U.S. data: the manufacturing sector grew
in August for the first time in 19 months, while pending home
sales hits a two-year high in July. For more see
[ID:nN01376541].
                                
 Government bond prices on both sides of the Atlantic rose
as falling stocks enhanced the allure of lower-risk safe-haven
debt despite the fresh evidence supporting the view of a global
economic recovery. [ID:nN01488059] [ID:nL1726052]
                                
 There are "new concerns about the health of the banking
system, the number of bank failures that continues to grow by
the day," said Peter Kenny, managing director at Knight Equity
Markets in Jersey City, New Jersey.
                                
 A sharp drop in bank stocks in late morning trading pulled
the Dow industrials <.DJI> and the broad Standard & Poor's 500
Index <.SPX> down 2 percent on fears of balance-sheet trouble
in the U.S. financial sector.
                                
 The KBW bank index <.BKX> slipped 4.6 percent, with shares
of Citigroup <C.N> off 7.2 percent at $4.64 among top drags.
                                
 Three more U.S. banks failed last Friday, bringing the
total to 84 so far this year, as the banking industry grapples
with deteriorating loans on their books. Only 25 U.S. banks
failed last year, while three failed in all of 2007.
                                
 The Federal Deposit Insurance Corp reported last week that
its deposit insurance fund fell 20 percent to $10.4 billion at
the end of the second quarter. Worries about the FDIC's access
to capital was also weighing on the market, Kenny said.
                                
 At 1:20 p.m. (1720 GMT), the Dow Jones industrial average
<.DJI> was down 185.91 points, or 1.96 percent, at 9,310.37.
The Standard & Poor's 500 Index <.SPX> was down 21.34 points,
or 2.09 percent, at 999.28. The Nasdaq Composite Index <.IXIC>
was down 41.11 points, or 2.05 percent, at 1,967.95.
                                
 European equities closed sharply lower after mixed economic
data, led lower by banks and commodity stocks. [ID:nL1126558]
                                
 The FTSEurofirst 300 <.FTEU3> index of top European shares
ended down 1.8 percent at 954.15.
                                
 Net lending to Britons in July fell at its sharpest pace
since records began in 1993, even as the number of mortgages
approved rose to its highest since April 2008, Bank of England
figures showed. [ID:nL1139336]
                                
 "The market is still overall concerned about the
sustainability of the recovery," said Orlando Green, interest
rate strategist at Calyon, adding that government measures such
as the cash for clunkers may have boosted the result.
                                
 "There are still doubts whether the economy can stand up by
itself away from these government initiatives."
                                
 U.S. crude oil for October delivery <CLc1> fell $1.21 to
$68.75 per barrel, while London Brent crude <LCOc1> dropped
$1.13 to $68.52.
                                
 The dollar extended gains versus the euro to hit session
highs on Tuesday as sharp losses in the U.S. stock market
boosted the greenback's safe-haven appeal.
                                
 The euro fell as low as $1.4221, and was last down 0.7
percent $1.4235 <EUR=>.
                                
 Copper prices slipped as investors worried about the pace
of economic recovery in China, but they trimmed losses after
the release of bullish U.S. manufacturing data. [ID:nL1592159]
                                
 The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
12/32 in price to yield 3.36 percent.
                                
 September Bund futures <FGBLc1> settled at 122.61, down 2
ticks from Monday, but it later traded up 23 ticks at 122.84.
                                
 A rebound in Chinese stocks <.SSEC> after Monday's sell-off
helped lift Asian shares. The MSCI index of Asia Pacific stocks
traded outside Japan <.MIAPJ0000PUS> rose nearly 1 percent,
while Japan's Nikkei <.N225> closed up 0.4 percent.
 (Reporting by Rodrigo Campos, Edward Krudy, Wanfeng Zhou,
Rebekah Kebede and Burton Frierson in New York and Atul
Prakash, Ian Chua and Michael Taylor in London; Writing by
Herbert Lash; Editing by James Dalgleish)