* MSCI world equity index down 3.8 pct at 229.15
* Panic selling hits Asian, European bourses and oil
* Dash for cash even hits government bonds; yen, gold rise
(Updates prices, adds LIBOR)
By Natsuko Waki
LONDON, Oct 10 (Reuters) - Europe and Asia saw panic selling
of stocks on Friday, knocking the benchmark world equity index
to a 5-year trough, while oil fell to a one-year low as fears
grew policymakers are not making enough efforts to contain the
financial crisis.
Government bonds in Japan and the euro zone -- usually safer
assets which outperform in times of risk aversion -- fell as
investors dashed to cash in any assets they have to gain access
to capital.
Equity trading in Russia, Iceland, Romania, Ukraine and
Indonesia has been halted while nearly half the stocks in Milan
are suspended for excessive losses, just hours before finance
chiefs from Group of Seven rich nations meet in Washington.
So far, measures from the United States, Britain and other
countries to fight the worst financial crisis in 80 years --
even this week's coordinated interest rate cuts -- have failed
to calm credit and money markets and quell investor fears.
"The stark reality is that markets have judged the
coordinated interest rates cut not to have been enough, and we
are now left wondering how best to get ourselves out of this
downward spiral," said Chris Hossain, senior sales manager at
ODL Securities.
"One gets the feeling that this market is now strictly
confined to the brave."
MSCI world equity index <.MIWD00000PUS> fell more than 4
percent at one point to a five-year low, losing a fifth of its
value this month alone. The index has lost 43 percent since
January, on track for its worst weekly, monthly and yearly
performance in 20 years.
RELENTLESS SELL-OFF
Japanese stocks <> fell nearly 10 percent for their
biggest one-day percentage loss since 1987. Yamato Life
Insurance, an unlisted midsized insurer, became the first
Japanese financial institution to collapse in this crisis.
In Japan, investors dumped even domestic government bonds --
considered safer than most other assets -- as fears of
counterparty defaults froze the key repurchase market, prompting
dealers to sell bonds to secure cash.
"This is panic... There's nothing left for us to trust,"
said Takashi Ushio, head of investment strategy at Marusan
Securities. "Investors are scurrying to convert to cash. A lack
of confidence is coupling with panic."
U.S. stock futures were down around 2 percent <SPc1>,
indicating a weaker open on Wall Street on Friday, a day after
the ban on short selling was lifted.
Tensions persisted in the money market, where the cost of
borrowing dollars for three months rose to 4.81875 percent
<LIBOR> at the fixing in London. This compares with market
expectations that the Federal Reserve would cut interest rates
to at least 1.25 percent by January.
In the European credit market, sentiment deteriorated
sharply with spreads measured by the Crossover index
<ITEX05Y=GF> hitting a fresh high of 747 basis points.
"The market is catching up with the grim reality that this
isn't going to be a mild downturn. The mass leverage that people
have built up over the past decade or more is catching up, and
it's going to be a long and painful process," said James
Hamilton, bank analyst at Numis.
Emerging stocks <.MSCIEF> fell 3.8 percent to a fresh
three-year low while emerging market spreads <11EMJ> widened 10
basis points to trade 556 basis points over U.S. Treasuries.
U.S. crude oil <CLc1> fell 5 percent to a one-year low of
$81.13 a barrel as fears rose over cooling demand for energy.
The December bund future <FGBLc1> fell 64 ticks, with
investors anticipating a flood of new issuance to fund
government plans to aid the financial sector.
The yen, which benefits from a surge in risk aversion, rose
0.4 percent against the dollar to 99.76 yen <JPY=> while
sterling hit a five-year low of $1.6802 <GBP=> at one point.
The dollar <.DXY> rose 0.15 percent against a basket of
major currencies.
(Additional reporting by Steve Slater and Rebekah Curtis)
