By Michael P. Regan and Stephen Kirkland Sept. 7 (Bloomberg) -- Stocks dropped, while Greek, Portuguese and Irish bonds tumbled and the yen surged to a 15- year high versus the dollar on concern Europe’s debt crisis will worsen. Treasuries, gold and German bunds climbed. The MSCI World Index slid 1 percent and the Standard & Poor’s 500 Index lost 0.9 percent at 11:07 a.m. in New York. The gaps between 10-year German bond yields and Irish and Portuguese debt climbed to all-time highs, while the German-Greek yield spread increased to the widest since May. The yen rose to as little as 83.52 per dollar as the Bank of Japan refrained from announcing a new increase to bank loans. The 10-year Treasury yield lost 6 basis points to 2.64 percent. Gold neared a record. Banks led stocks lower on concern European lenders will require more capital to compensate for holdings of bonds in the region’s weakest economies. Germany’s banking association said yesterday that the nation’s banks need to raise $135 billion and Pacific Investment Management Co. said Greece still faces “substantial” default risk. “Banks still face problems in regards to their capital ratios,” said Michael Koehler, head of strategy at Landesbank Baden-Wuerttemberg in Mainz, Germany. “Investors will keep worrying about a possible double dip in the next few weeks,” he said, referring to a renewed recession. The rally in gold, Treasuries and the yen came as investors sought assets perceived as the safest. Even after a 750 billion euro ($960 billion) bailout for the weaker economies in the euro zone, investors are skittish about sovereign debt of some nations -- and about the banks that hold the region’s government bonds. A default by Greece could trigger the collapse of banks with large sovereign-bond holdings, says Konrad Becker, an analyst at Merck Finck & Co. in Munich. Bond Spreads The German bund yield dropped 9 basis points to less than 2.25 percent. Greek bonds plunged, pushing the yield on the 10- year security up 32 basis points relative to bunds to 947 basis points, the most since the European Union and International Monetary Fund crafted the bailout package in May. The German-Irish 10-year yield spread climbed to 380 basis points, the highest since Bloomberg started compiling the data, from 343 basis points. It was at 376 basis points as of 2:15 p.m. in London. The Portuguese-German spread reached 355 basis points, also a record, from 333 basis points. Wider spreads signaled increased concern that the most indebted European nations will struggle to fund budget deficits. U.S. Rally Halted The S&P 500 dropped for the first time in five days, halting its longest streak of gains since July. Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. dropped at least 1.5 percent to pace a retreat in 77 of 80 financial companies in the index. President Barack Obama is planning to increase tax relief for businesses and federal spending on the transportation system to bolster an economy that’s losing jobs heading into the November congressional elections. The unemployment rate may approach 10 percent in coming months, according to economists at BofA Merrill Lynch Global Research and Morgan Stanley. Japan’s and Australia’s central banks signaled the outlook for U.S. growth is deteriorating, making it tougher for them to set monetary policy. The Reserve Bank of Australia extended a pause in raising interest rates “for the time being” today, even after the nation’s gross domestic product rose the most since 2007. The Bank of Japan said it’s prepared to add more monetary stimulus after last week’s emergency decision to expand a credit program. European Stocks Almost seven shares fell for every one that gained in the Stoxx Europe 600 Index, which lost 0.6 percent after reaching a four-week high yesterday. A government report showed German factory orders unexpectedly fell in July as demand in the euro region weakened, indicating the recovery in Europe’s largest economy is losing momentum. The MSCI Asia Pacific Index slipped 0.1 percent. Banco Santander SA slid 1.6 percent and BNP Paribas SA lost 2.6 percent. Barclays Plc sank 2.8 percent as Britain’s third- largest bank named President Robert Diamond as chief executive officer, succeeding John Varley. European bank stress tests published in July understated sovereign debt holdings at some financial institutions, the Wall Street Journal reported, citing its own analysis. The cost of insuring financial-company bonds against default climbed by the most in a month, with the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers rising 7.5 basis points to 137, according to JPMorgan Chase & Co. Rio Tinto Group helped lead basic-resources stocks lower in Europe, losing 2.1 percent, as Australian Prime Minister Julia Gillard clinched a deal to keep power. Gillard’s Labor government has proposed a tax on mining profits. Yen Rallies The yen rose against all 16 of its major peers, strengthening 1.7 percent to 106.57 versus the euro. The euro weakened 1.1 percent to $1.2735. Australia’s dollar dropped 0.5 percent against the U.S. currency. Growing pressure on the Federal Reserve to print more money to bolster the U.S. economy will likely boost the yen and franc just as the Japanese and Swiss governments seek weaker currencies, if history is a guide. Those currencies appreciated the most on a relative basis after Fed efforts between December 2007 and March 2009 to jumpstart the economy expanded the central bank’s balance sheet to as much as $1.15 trillion, a Barclays Capital analysis of 17 exchange-rate pairs shows. The dollar strengthened against all 16 major currencies except the yen and franc. The Dollar Index, which gauges the currency against six major trading partners, rallied 0.8 percent to 82.68. Gold Surges Gold futures for December delivery rose $8.30, or 0.7 percent, to $1,259.40 on the Comex in New York. Earlier, the metal climbed to the highest level for a most- active contract since June 28. The exchange was closed yesterday for Labor Day. Copper for delivery in three months fell 1.5 percent on the London Metal Exchange. The S&P GSCI index of 24 commodities lost 1.1 percent, the first decline since Aug. 31. Corn was down 0.6 percent. Crude for October delivery retreated 2.4 percent to $72.85 a barrel on the New York Mercantile Exchange. Yesterday’s transactions will be booked with today’s for settlement purposes as there was no floor trading because of the Labor Day holiday. The MSCI Emerging Markets Index slipped 0.6 percent, the first decline this month. OTP Bank Nyrt., Hungary’s largest lender, led the BUX index 1 percent lower. Russia’s Micex index lost 0.7 percent, dragged down by energy and mining companies. To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Stephen Kirkland in London at skirkland@bloomberg.net.

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