LONDON (Reuters) - World stocks fell to a two-week low on Thursday and oil hit a 22-month trough as Washington's move to back away from its plan to buy toxic assets and weak U.S. earnings reports deepened gloom about the global economy.
Sterling slumped to a 12-year low on a trade-weighted basis and also hit a 6-1/2 year low against the dollar a day after the Bank of England's report showing a fast-shrinking economy opened door for more interest rate cuts.
The Bush administration largely abandoned its plan to buy up toxic mortgage assets and it will focus its $700 billion financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.
This, combined with a dismal forecast from Best Buy (BBY.N: Quote, Profile, Research, Stock Buzz) and a revenue warning from Intel (INTC.O: Quote, Profile, Research, Stock Buzz), sent Asian stocks down by nearly 5 percent, although European stocks manage to pare early losses.
"Equity markets have found the reverse gear once again... Critically, the U.S. has shifted its focus for the financial bailout," said Matt Buckland, dealer at CMC Markets. The MSCI world equity index .MIWD00000PUS fell 1.4 percent, approaching October's five-year lows, while the FTSEurofirst 300 index fell 0.1 percent.
Sterling fell as low as $1.4807 and 82.1 on a trade-weighted basis. The dollar .DXY was steady against a basket of major currencies.
Investors expect the Bank of England to follow up November's shock 1.5 point interest rate cut next month with another half a point reduction as it tries to drag Britain out of recession. The cost of borrowing now stands at 3 percent.
Emerging stocks .MSCIEF fell more than 3 percent to hit their lowest level since late October, when the index hit a four-year low. A speedy recovery recorded since then seems to be unwinding equally fast.
"We now expect the relative momentum to ease and that the risk reward for holding emerging long and the world short be far less attractive as market conditions once again are deteriorating," SEB said in a note to clients.
U.S. crude oil fell 2 percent to $55.04 a barrel as worries grew that a global recession would sap energy demand.
The December bund futures rose 12 ticks while two-year government bond yield fell to a three-year low of 2.23 percent as demand soared for safer government securities.
(Additional reporting by Jon Hopkins; Editing by Toby Chopra)
