Downturns and blowdowns rattle investors

By Jeremy Gaunt, European Investment Correspondent

LONDON, Sept 1 (Reuters) - Financial markets began the month pressured on all sides on Monday with Hurricane Gustav lifting the price of oil, economic fear driving equities lower and gloom about Britain's downturn knocking sterling to a 12-year low.

Investors also appeared unhappy with Commerzbank's (CBKG.DE: Quote, Profile, Research, Stock Buzz) $14.5 billion purchase of Dresdner Bank from Allianz (ALVG.DE: Quote, Profile, Research, Stock Buzz).

The dollar was generally stronger and euro zone government bond yields fell as investors bought into safe-haven plays. U.S. markets were closed for the Labor Day holiday.

Crude oil prices rose around $1.50 a barrel as Gustav shut down nearly all offshore oil output in the U.S. Gulf and threatened the Louisiana coast.

Prices pared earlier sharp gains, however, as traders pondered whether the Category 3 storm would leave lasting damage. Nearly 2 million people have fled the coast.

"This is definitely a dangerous storm but I think most of the market is in a wait-and-see mode, waiting to see (if there are) disruptions to oil facilities and pipeline infrastructure before they make a big move," said Gerard Burg, a commodities analyst at the National Bank of Australia in Melbourne.

U.S. light crude for October delivery CLc1 was up $1.47 at $116.93 a barrel, having briefly surged above $118 a barrel.

While higher crude prices generally weigh on stocks, investors are mostly concerned at the moment with worries about the depth of a global economic slowdown.

This was clearest on Monday on currency markets, where Britain's pound fell to a 12-year low on a trade-weighted basis. It was also down three-quarters of a percent at around $1.80 , compared with more that $2 in July.

The declines followed Chancellor of the Exchequer (finance minister) Alistair Darling's comments that the UK's economic downturn is likely to be deeper and last longer than originally feared and might turn out to be the worst for 60 years.

"Most people believed that things were probably deteriorating faster in the UK than the government was admitting, but the fact that we've seen the chancellor come out and admitting that things are far worse have put sterling under pressure," said Ian Stannard, senior currency strategist at BNP Paribas.

TOO MUCH

Equity markets, in the meantime, were kicking off the month on a down note, generally gloomy about the economic outlook.

European shares fell sharply in early trade, led by banks as Commerzbank tumbled more than 6 percent after agreeing its deal to buy Dresdner.

The FTSEurofirst 300 index of top European shares was down around 0.8 percent, starting the month off on a weak note after notching up a gain of 1.2 percent in August, only its second monthly gain in 10 months. Allianz was down nearly 1 percent.

Investors appeared to believe the deal was too expensive. "On a first glance we don't like the transaction at all," DZ Bank said in a note.

Earlier, Japan's Nikkei stock average .N225 shed 1.8 percent as Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz) and other exporters fell on worries about the economy and a slightly stronger yen.

The benchmark Nikkei shed 238.69 points, completely erasing last week's gains, to finish at 12,834.18. The broader Topix lost 1.9 percent to 1,230.64.

Euro zone government bond prices shot higher after the gloomy comments from Britain's Darling triggered concern that a similar outlook would be felt throughout the euro zone.

Two-year yields fell 8 basis points to 4.041 percent while 10-year yields were 3 basis points down at 4.141 percent .