* U.S. stocks slide 2 percent on financial jitters
* Oil rises after militants attack two Nigerian pipelines
* Dollar falls as credit worries limit possible rate hike
* Government debt rises as 2 bank failures spur safety bid
(Adds close of U.S. markets)
By Herbert Lash
NEW YORK, July 28 (Reuters) - U.S. stocks fell sharply on
Monday, following a fall in Europe, as fear of more credit
losses slammed the banking sector and spurred a new flight to
safety through purchases of U.S. government debt.
The failure of two small U.S. banks late on Friday renewed
jitters about financial stocks, the were the biggest drag on
the Dow, the S&P 500. In Europe, the leading stock index was
also pulled down by disappointing corporate results.
The dollar eased as persistent credit worries cast a pall
over the health of the U.S. economy despite somewhat upbeat
housing and consumer sentiment data on Friday.
Concern over the battered U.S. financial sector came to the
fore after Merrill Lynch <MER.N> said Lehman Brothers Holdings
Inc <LEH.N> may post a loss in the third quarter and take a
further $2.5 billion write-down on home loans.
Then shares of Merrill Lynch itself fell more than 11
percent to $24.33
Lehman shares dropped 10.4 percent to $15.27.
Among othe banks that took big hits, Citigroup <C.N> fell
more than 7 percent to $17.43 and Bank of America <BAC.N> was
off more than 5 percent at $28.06.
"People are just very skittish here... you still have all
the worries about the financial sector," said Richard Lee,
managing director of fixed income at brokerage Wall Street
Access in New York.
The Federal Deposit Insurance Corp seized two small U.S.
banks, First National Bank of Nevada and First Heritage Bank NA
of California, and sold them to the Mutual Omaha Bank.
In a semiannual report on global financial stability, the
International Monetary Fund underlined that the worst of the
credit crisis may not be over.
Global markets remain under strain from the U.S. housing
crisis and fragile financial markets has made it more difficult
for central banks to hike rates to fight inflation, the IMF
said.
"People are still afraid of the bad news from the financial
sector," said Victor Pugliese, director of listed equity
trading at Broadpoint Securities in San Francisco.
"Any time you see a bank failing, whether it's a big bank
or a small bank, it's going to be a problem because it says
financials are not out of the woods."
Among other banks that took big hits, Citigroup <C.N> fell
more than 7 percent and Bank of America <BAC.N> was off more
than 4 percent.
Banks also fell in Europe, where Citigroup cut its stance
on banks to "underweight" from "neutral."
UBS <UBSN.VX> fell 5.5 percent, Royal Bank of Scotland
<RBS.L> dropped 4.1 percent and Barclays <BARC.L> lost 5
percent.
"There is a deep-seated problem with many of these banks,"
said David Buik of Cantor Index in London.
The Dow Jones industrial average <> fell 239.61 points,
or 2.11 percent, at 11,131.08. The Standard & Poor's 500 Index
<.SPX> slid 23.39 points, or 1.86 percent, at 1,234.37.
TheNasdaq Composite Index <> declined 46.31 points, or
2.00 percent, at 2,264.22.
Government debt prices rose in light trade as many
investors hesitated to make decisions before a monthly reading
of nonfarm U.S. payrolls on Friday, often a key catalyst for
the bond market.
The benchmark 10-year U.S. Treasury note <US10YT=RR> rose
22/32 to yield 4.02 percent. The 30-year U.S. Treasury bond
<US30YT=RR> added 34/32 to yield 4.62 percent.
The pan-European FTSEurofirst 300 <> index closed
down 0.9 percent at 1,158.86 points, falling for a third
session in a row.
But the European market's fall was cushioned by buoyant
mining shares, helped by gains in metal prices. Energy stocks
rose ahead of key quarterly results in the sector expected this
week and as oil recovered from a recent sharp drop.
Royal Dutch Shell <RDSa.L>, BP <BP.L> and Total <TOTF.PA>
rose slightly as crude oil <CLc1> edged higher.
Oil prices rose more than $1 after militant attacks slashed
Nigerian oil production and Iran stirred geopolitical tensions
by suggesting it was rapidly expanding its nuclear program.
Gains were limited by fresh evidence high prices were
shrinking U.S. demand, a trend that has contributed to a record
sell-off in oil prices since a peak in mid-July.
U.S. crude <CLc1> gained $1.47 to settle at $124.73 a
barrel, down from the July 11 record over $147. London Brent
<LCOc1> rose $1.32 to $125.84 a barrel.
Gold ended slightly higher as the metal's alternative
investment appeal received a boost from worries about the
financial sector. A sagging dollar and a rise in crude prices
also lifted gold's appeal.
Gold <XAU=> rose to $928.45/929.65 by New York's last
quote.
The euro <EUR=> rose 0.20 percent at $1.574.
The dollar fell against major currencies, with the U.S.
Dollar Index <.DXY> off 0.19 percent at 72.683. Against the
yen, the dollar <JPY=> fell 0.39 percent at 107.43.
Asian stocks were mixed as financial sector uncertainty
lingered ahead of a slew of company earnings.
Japan's Nikkei share average <> edged up 0.1 percent
after U.S. economic data from Friday spurred hopes for the
country's weakened export sector.
Outside Japan, shares in Asia-Pacific were down 0.2
percent, according to an MSCI index <.MIAPJ0000PUS>.
(Reporting by Walter Brandimarte, Lucia Mutikani, Richard
Leong in New York and Alex Lawler, Emelia Sithole-Matarise and
Rebekah Curtis in London)
(Reporting by Herbert Lash. Editing by Richard Satran)
