(Updates prices, adds Wall Street outlook)
* Bailout talk failure shakes investors
* Stocks weak, led by banks
* Yen rises on risk aversion flows
* Money markets under renewed stress
By Jeremy Gaunt, European Investment Correspondent
LONDON, Sept 26 (Reuters) - Washington's failure to agree a
bailout plan yet for the shattered U.S. banking system sent
global stocks sharply lower on Friday and weakened the dollar,
while the crisis put money markets under massive stress.
Government bond yields fell as investors sought safe havens.
"It's all about ongoing concerns about the banking crisis
and where it's going to end," said Padhraic Garvey, head of
investment grade strategy at ING in Amsterdam.
Wall Street looked set for a poor opening and European
shares were down around 2 percent after negotiations over the
White House's unprecedented $700 billion bailout scheme
degenerated into chaos overnight.
Adding to the woes, U.S. authorities shut down Washington
Mutual <WM.N>, the largest U.S. savings and loan bank, and sold
its banking assets to JPMorgan Chase & Co <JPM.N> for $1.9
billion.
In Europe, the spotlight fell on Fortis <FOR.BR> as shares
in the Belgian-Dutch financial services group fell for a fifth
straight day. The bank said it had no liquidity problem but was
looking to sell more non-core activities than anticipated.
Underlying the drying up of finance that lies behind the
crisis, three-month dollar interbank rates -- which include the
seasonally illiquid Christmas period -- remained at high levels
at the London fixing. Three-month dollar LIBOR rates stood at
3.76 percent <LIBOR>, a record 202 basis points above expected
U.S. interest rates.
The closely-watched TED spread -- the difference between
market-based dollar rates and three-month U.S. government
borrowing rates -- stood at around 295 basis points.
This gauge of risk aversion and tightness in short-term
lending ballooned last week to almost 500 basis points, the
widest in over a quarter of a century.
Intensifying money market stress and a global shortage of
dollars come despite strenuous efforts by major central banks to
pump hundreds of billions of dollars into the money market to
keep the interbank system afloat.
Central banks in the euro zone, Britain and Switzerland
stepped up their efforts on Friday with a new plan to pump in
one-week dollar funds.
IMPASSE
Negotiations on the White House plan to buy up toxic assets
came a cropper after Republicans offered a rival proposal to
offer mortgage insurance. Talks were to continue later on Friday
and some investors believed agreement would eventually be found.
"We are not too concerned about failure to announce the
package overnight. We think this is natural politics playing its
hand in the run up to the presidential elections," said Graham
Secker, UK equity strategist at Morgan Stanley.
"We would expect some positive results from the discussions
within the next few days."
The uncertainty nonetheless hit stock markets, particularly
in the finance sector.
The FTSEurofirst 300 <> index of top European shares
was down 1.8 percent with the likes of Royal Bank of Scotland
<RBS.L> down 3.2 percent and UBS <UBSN.VX> off 3.6 percent.
Insurers were also weak, with France's AXA <AXAF.PA> falling
3.9 percent.
Earlier, Japan's Nikkei stock average slipped 0.9 percent on
Friday to its lowest close in eight days. The benchmark <>
shed 113.37 points to 11,893.16. The broader Topix <> was
down 0.5 percent at 1,147.89.
In a sign of how widely worry about stock markets and the
global economy has spread, a Japanese retail investor sentiment
index tumbled to match its lowest point ever, with individual
investors remaining pessimistic about domestic equities
[].
SAFE HAVENS
On currency markets, the low-yielding Japanese yen jumped
against the euro and dollar as investors ran from riskier
assets. The euro fell 1.2 percent on the day and slid below 154
yen <EURJPY=>, while the dollar fell 1 percent to 105.3 yen
<JPY=>.
In another sign of risk aversion, the Icelandic crown hit a
record low versus the euro as currency plays unwound <EURISK=>.
Euro zone government bond prices rose. Two-year paper
yielded 3.770 percent <EU2YT=RR>, 9 basis points less than in
late Thursday trade while 10-year Bund yields were 2 basis
points lower at 4.209 percent <EU10YT=RR>.
(Additional reporting by Emelia Sithole and Dominic Lau,
editing by David Stamp)
