Europe halts world stock rally as U.S. plan eyed

By Natsuko Waki Mon Sep 22, 4:29 AM ET

LONDON (Reuters) - European stocks halted a rally in world equities on Monday and the dollar fell as jittery investors awaited detail of Washington's $700 billion bailout to tackle the worst financial crisis since the Great Depression.

Global stocks posted the biggest one-day gain in 20 years on Friday after the U.S. Treasury proposed the largest-ever bank rescue plan and world authorities banned short selling and exercised other measures to restore calm in the markets.

However, many aspects of the U.S. plan have yet to be worked out and concerns remained over the slowing U.S. economy and its impact on the rest of the world after a frantic week which saw the collapse of Lehman Brothers and the firesale of Merrill Lynch (MER.N) and UK bank HBOS (HBOS.L).

"The $700 billion plan should stem the bleeding. However, the patient is still fragile," said Thomas Lam, senior Treasury economist at United Overseas Bank in Singapore.

"Essentially, the focus, I think, should shift to some extend from the state of illiquid securities to fundamentals of the U.S. economy and availability of capital."

The FTSEurofirst 300 index fell 0.7 percent while MSCI main world equity index rose 0.6 percent, after rallying more than 6 percent on Friday -- its biggest percentage gain since 1988.

Shares of Goldman Sachs (GS.N) and Morgan Stanley (MS.N) fell in Europe after they became bank holdings companies regulated by the Federal Reserve, giving up their cherished investment banking status in return for cover under the central bank's wing.

"We need to see more details from the rescue package. What is missing is the price the U.S. authorities are going to pay for the toxic assets. This will determine the further performance of the banking sector," said Heino Ruland, analyst at FrankfurtFinanz.

The dollar was down 0.7 percent at $1.4598 per euro while the low yielding yen rose half a percent to 106.32 per dollar.

The December Bund future was down 4 ticks, paring early losses in a sign that investors were flowing back to buy safe-haven instruments.

In the interbank market, tensions remained despite a concerted action by the world's central banks to inject liquidity to the tune of hundreds of billions of dollars and Washington's $50 billion money market guarantee program.

The premium on interbank lending rates for three-month dollars over the yield on risk-free U.S. Treasury paper stood around 220 basis points.

Emerging sovereign spreads tightened 2 basis points to trade 353 bps over U.S. Treasuries, while emerging stocks rose 1 percent.

U.S. light crude rose 0.7 percent at $105.35 a barrel while gold rose to $872.80 an ounce.

(Additional reporting by Joanne Frearson, editing by Mike Peacock)