GLOBAL MARKETS-Stocks tumble on bank failure fears, bonds gain

                                
 * U.S. stocks slide as bank failure fears spook investors
                                
 * Yen, dollar rise as bank fears drive safe-haven allure
                                
 * Oil settles near $68 as confidence in recovery wanes
                                
 * Bonds climb as stocks falter
 (Updates with close of U.S. markets)
                                
 By Herbert Lash
                                
 NEW YORK, Sept 1 (Reuters) - U.S. stocks fell sharply on
Tuesday on fears of rising U.S. bank failures and concerns
about the lasting strength of the recent equity rally, driving
investors into the relative safety of bonds and the U.S.
dollar.
                                
 Crude oil slumped to almost $68 a barrel as the resurgence
of fears about the U.S. financial sector sapped positive
sentiment from data showing U.S. manufacturing grew for the
first time in 19 months and pending home sales hit a two-year
high. For more see [ID:nN01376541]
                                
 Both the yen and dollar strengthened on their safe-haven
appeal as fears of further U.S. bank failures overshadowed the
economic data. Government bond prices rose on both sides of the
Atlantic in the face of tumbling equity markets.
                                
 The three major U.S. stock indexes <.DJI> <.SPX> <.IXIC>
fell about 2 percent, while the Reuters-Jefferies CRB index
<.CRB> of 19 commodities, which is strongly weighted by crude
oil, fell almost 1.9 percent to a one-month low.
                                
 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.
                                
 The KBW bank index <.BKX> skidded 5.8 percent, with
Citigroup <C.N> down 9.2 percent and Bank of America <BAC.N>
off 6.2 percent. Citigroup, as often is the case, was the most
active stock among New York Stock Exchange-listed shares, with
volume more than three times that of Bank of America.
                                
 Three more U.S. banks failed on Friday, bringing the total
to 84 so far this year, as the banking industry grapples with
deteriorating loans. That compares to a total of 25 bank
failures last year and only three 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 also weighed on the market, Kenny said.
                                
 The Dow Jones industrial average <.DJI> closed down 185.68
points, or 1.96 percent, at 9,310.60. The Standard & Poor's 500
Index <.SPX> fell 22.58 points, or 2.21 percent, at 998.04. The
Nasdaq Composite Index <.IXIC> slipped 40.17 points, or 2.00
percent, at 1,968.89.
                                
 Chatter from hedge funds about a bank failure was "a huge
driver" in currency markets, overshadowing the economic data,
said Dan Cook, senior market analyst at IG Markets Inc in
Chicago.
                                
 "When you have data like we had but the Dow drops, people
are running for that safe haven," Cook said.
                                
 The dollar index <.DXY>, which tracks a basket of six major
currencies, was up 0.7 percent at 78.747, rebounding from a
session low of 77.944, according to Reuters data.
                                
 The dollar was down 0.1 percent against the yen <JPY=> at
92.89 yen, above Monday's seven-week low of 92.53.
                                
 U.S. crude for October delivery <CLc1> settled 2.73 percent
lower at $68.05. In London, Brent crude <LCOc1> dropped $1.92
to settle at $67.73 a barrel. [ID:nL1558697]
                                
 Gold futures ended higher as the slide on Wall Street
chased investors into bullion. [ID:nL1594364]
                                
 U.S. December gold futures <GCZ9> settled up $3 at $956.50
an ounce in New York.
                                
 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 the highest since April 2008, Bank of England
figures showed. [ID:nL1139336]
                                
 The benchmark 10-year U.S. Treasury note <US10YT=RR> was up
9/32 in price to yield 3.37 percent.
                                
 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 Angela Moon, Nick Olivari, Zhou, Rebekah Kebede
and Burton Frierson in New York; Atul Prakash, Ian Chua and
Michael Taylor in London; writing by Herbert Lash; Editing by
Leslie Adler)