* Global stocks down around 1 pct, Europe off 0.2 pct
* Pound plunges against dollar, euro slides
* Euro zone bond spreads widen
By Jeremy Gaunt, European Investment Correspondent
LONDON, Jan 20 (Reuters) - Fears about banks and the world
economy underlined the difficulties confronting incoming U.S.
President Barack Obama on Tuesday, sending equities sharply
lower.
Wall Street looked set for a poor start. The dollar was
stronger, however, with Britain's pound plunging more than 3.5
percent on worries about the UK's banking system.
World stocks as measured by MSCI <.MIWD00000PUS> were down
1.2 percent. Emerging markets equities <.MSCIEF> lost 2.2
percent and Japan's Nikkei average <> closed down 2.3
percent.
European shares fell despite a stronger-than-expected ZEW
analyst and investor sentiment index, which rose to -31.0 from
-45.2 and in comparison to so -44.0 expectation. []
The FTSEurofirst 300 <> was down 0.7 percent.
U.S. stock futures were down sharply as Wall Street prepared
to re-open after the Martin Luther King Jr holiday and the
world's attention was focused on Obama's inauguration.
Obama is to push a huge stimulus package to move the
world-leading U.S. economy out of its severe slump.
"The market is refocusing on the bigger global picture,"
said Justin Gallagher, head of Sydney sales trading at ABN AMRO,
pointing as well to expectations for weak corporate earnings
results in coming weeks.
"Clearly the market today continues to factor in more
disappointment and certainly, despite the inauguration of Obama
... the market is looking past that now and realising just how
big a mess the global economy is in," he said.
Banks were in focus after Royal Bank of Scotland <RBS.L> on
Monday unveiled the biggest loss in U.K. corporate history, and
after Britain launched a second bank rescue plan that failed to
restore confidence in the wobbly financial sector.
RBS was up 11 percent, but only after having plunged 67
percent on Monday.
"After yesterday's carnage the smoke is still hanging over
the market," said Justin Urquhart Stewart, director at Seven
Investment Management.
"People talk about the nationalisation of the banks. That's
almost beside the point, like interest rate cuts. What we have
is the nationalisation of banking policy."
POUND PLUNGES
The pound plunged to a 7-1/2 year low against the dollar on
the banking sector woes, while the euro dropped to a six-week
low against the U.S. currency, weighed by worries about the
state of the euro zone economy.
Sterling <GBP=> was 3.4 percent down against the dollar at
$1.3965, around the lowest level since July 2001, while the euro
fell around 1 percent to $1.2990, having hit a six-week low of
$1.2923 <EUR=>.
Fears about the outlook for the euro zone economy weighed on
the euro after the European Commission on Monday issued a grim
2009 forecast and Standard and Poor's cut Spain's debt ratings.
"The Obama euphoria is dollar positive and the biggest
casualty of this is sterling because by contrast sterling
sentiment is really bad," Commerzbank currency strategist Antje
Praefcke said.
European sovereign debt sold off as worries over countries'
economic health grew in the face of credit rating downgrades and
the mounting debt piles needed to fund financial sector
bailouts.
On credit markets, the cost of insuring against default by
some countries hit record highs.
"Markets are fretting about the level of supply to finance
the ever-increasing debt issuance needed to support the banking
sector, especially in the U.S. and UK," said Nick Stamenkovic, a
strategist at RIA Capital Markets.
German Bunds outperformed their U.S. and UK counterparts
with 10-year yields half a basis point higher at 2.998 percent
and March futures <FGBLH9> 6 ticks lower at 125.12. The
short-end performed better, with 2-year yields 3.3 basis points
lower at 1.499 percent.
In the wider market, the premium investors demand to buy
10-year Belgian, Dutch and Greek government bonds rose to a
fresh record, according to Reuters data, driven by downgrade
worries.
(Additional reporting by Rebekah Curtis, Rafael Nam, Jessica
Mortimer and Kirsten Donovan; Editing by Ian Jones)
