(Updates with oil price turning down)
By Jeremy Gaunt, European Investment Correspondent
LONDON, Sept 1 (Reuters) - Financial markets began the month
in a volatile mood on Monday with economic fear driving equities
lower and gloom about Britain's downturn knocking sterling to a
12-year low.
The price of oil swung from being up well over $1.50 a
barrel to registering losses of around $1.75 as Hurricane Gustav
showed no signs of strengthening in its way towards the U.S.
state of Lousiana.
Investors also were unhappy with Commerzbank's <CBKG.DE>
$14.5 billion purchase of Dresdner Bank from Allianz <ALVG.DE>.
The dollar was generally stronger and short-term euro zone
government bond yields fell as investors bought into safe-haven
plays. U.S. markets were closed for the Labor Day holiday.
Investors are mostly concerned at the moment with worries
about the depth of a global economic slowdown.
This was clearest on Monday on currency markets, where
Britain's pound fell to a 12-year low on a trade-weighted basis.
It was also down three-quarters of a percent at around $1.80
<GBP=> against the dollar, its lowest since April 2006 and a
sharp comparison with more that $2 in July this year.
The declines followed Chancellor of the Exchequer (finance
minister) Alistair Darling's comments that the UK's economic
downturn is likely to be deeper and last longer than originally
feared and might turn out to be the worst for 60 years.
"Most people believed that things were probably
deteriorating faster in the UK than the government was
admitting, but the fact that we've seen the chancellor come out
and admitting that things are far worse have put sterling under
pressure," said Ian Stannard, senior currency strategist at BNP
Paribas.
GUSTAV BLOWS
Crude oil prices <CLc1> initially rose above $118 a barrel
Gustav shut down nearly all offshore oil output in the U.S. Gulf
and threatened the Louisiana coast.
Prices reversed, however, as forecasts showed the storm was
not strengthening beyond earlier projections. U.S. light crude
for October delivery was down $1.71 at $113.75 a barrel.
"Gustav is not strengthening," said Mike Wittner of Societe
Generale. "That could be bearish."
The storm, however, is the biggest threat to the region --
home to a quarter of U.S. oil output and 15 percent of natural
gas output -- since Hurricanes Katrina and Rita wrecked more
than 100 offshore oil platforms in 2005 and closed several large
refineries for months.
Nearly 2 million people have fled the U.S. coastal areas.
TOO MUCH
Equity markets, in the meantime, were kicking off the month
on a down note, generally gloomy about the economic outlook.
European shares fell sharply in early trade, led by banks
as Commerzbank tumbled more than 6 percent after agreeing its
deal to buy Dresdner.
The FTSEurofirst 300 index of top European shares <>
was down around 0.9 percent, starting the month off on a weak
note after notching up a gain of 1.2 percent in August, only its
second monthly gain in 10 months. Allianz was flat.
Investors appeared to believe the deal was too expensive.
"On a first glance we don't like the transaction at all," DZ
Bank said in a note.
Earlier, Japan's Nikkei stock average <> shed 1.8
percent as Honda Motor Co <7267.T> and other exporters fell on
worries about the economy and a slightly stronger yen.
The benchmark Nikkei shed 238.69 points, completely erasing
last week's gains, to finish at 12,834.18. The broader Topix
<> lost 1.9 percent to 1,230.64.
Euro zone government bond prices shot higher after the
gloomy comments from Britain's Darling triggered concern that a
similar outlook would be felt throughout the euro zone.
Two-year yields fell 6 basis points to 4.061 percent
<EU2YT=RR> while 10-year yields were 1 basis points down at
4.161 percent <EU10YT=RR>.
