* MSCI world equity index down 1.6 percent at 203.69
* The euro hits 2-month low on emerging Europe worries
* Gov bonds firmer but intra-euro zone spreads widen
By Natsuko Waki
LONDON, Feb 17 (Reuters) - Growing concerns about
deteriorating emerging European economies hit European shares
and the euro on Tuesday, driving capital to safer government
bonds and gold.
World stocks fell to a two-week low while oil tumbled as
concerns intensified about the impact on corporate profits from
the shaky financial sector and a globalised economic slowdown.
The common currency hit a two-month low against the dollar
after credit rating agency Moody's said the recession in the
emerging economies of Europe was likely to be more severe than
elsewhere. [] This would put the financial strength
rating of local banks and their Western parents under pressure.
"The news on emerging Europe is important, especially for
countries like Austria and Germany and for certain banks. The
focus today is on the banks but it is also valid for the
manufacturing sector," said Gerhard Schwarz, head of global
equity strategy at UniCredit in Munich.
"Any further escalation of troubles in emerging Europe would
make more capacity cuts necessary and make it harder for the
manufacturing base to get ahead of the curve in terms of cost
cutting and inventory reduction."
The euro lost more than 1 percent to a low of $1.2603
<EUR=>. The FTSEurofirst 300 index of leading European shares
<> lost 1.9 percent to hit a three-week low.
MSCI world equity index <.MIWD00000PUS> fell 1.6 percent,
hitting its weakest since Feb. 2. Emerging stocks <.MSCIEF> lost
almost 3.5 percent.
After a holiday on Monday, Wall Street was set to open
weaker with U.S. stock futures <SPc1> down around 2 percent.
Wal-Mart stores <WMT.N> posted a quarterly profit which beat
Wall Street expectations, boosting its shares up 1 percent in
pre-market trading.
EMERGING WOES
Western European banks led by UniCredit <CRDI.MI>, Erste
Group Bank <ERST.VI>, Raiffeisen International <RIBH.VI> and
Societe Generale <SOGN.PA> have bought up most of emerging
Europe's banking sector in recent years to tap the rampant
credit growth that fuelled the region's boom.
"People are beginning to speculate that East Europe is maybe
the euro zone's subprime," said Adam Cole, head of FX strategy
at RBC Capital Markets.
A fresh wave of risk aversion this week has drawn funds into
safer government bonds. The yield on two-year euro zone debt
<EU2YT=RR> fell to 1.172 percent, its lowest on record.
However, within the euro zone, risk aversion flows are
fuelling capital into liquid German debt, driving spreads
between Greek, Dutch, Austrian and Portuguese debt and German
paper to their widest levels on record.
The March bund futures <FGBLc1> rose 17 ticks.
Spot gold rose 2 percent to $962.95 an ounce <XAU=>, its
highest in seven months. Gold, priced in the euro, sterling, the
South African rand and the Canadian dollar, hit record highs.
The dollar <.DXY> rose 1.1 percent against a basket of major
currencies.
The yen was down 0.2 percent at 91.94 per dollar <JPY=>
after Japanese Finance Minister Shoichi Nakagawa said he would
resign, despite denying he was drunk at a Group of Seven news
conference in Rome on the weekend.
U.S. crude oil <CLc1> fell 1.7 percent to $36.88 a barrel,
pressured by concerns that a slowing economy would hit energy
demand.
(Additional reporting by Sitaraman Shankar and Kirsten Donovan;
Editing by Victoria Main)
