Europe halts equity slide; yen and dollar firm

By Natsuko Waki

LONDON (Reuters) - Europe halted a slide in world stocks on Tuesday, keeping alive some momentum triggered by the bailout of U.S. mortgage firms Fannie Mae and Freddie Mac, while persistent economic worries boosted the yen and the dollar.

World stocks posted their biggest gains on Monday since the rescue of Bear Stearns in March after Washington seized control of two mortgage firms, whose losses have weighed on the domestic housing market and threatened to damage the financial system.

Optimism faded somewhat in Asia, while in Europe stocks extended gains with UK equities rising more than 1 percent -- after the market was severely disrupted on Monday with trading on the London Stock Exchange halted for several hours.

Investors view the bailout of two U.S. Government-Sponsored Enterprises (GSEs) as positive, while doubts remain as to how it would solve underlying credit problems faced by many banks and stem the flow of data pointing to a deep economic slowdown.

"There's still a lot of concern in the market on financials .... so risk appetite hasn't been boosted by this GSE announcement," said Patrick Jacq, rates strategist at BNP Paribas in Paris.

"It's good news because ... the key issue has been addressed, but isn't enough to (fully) restore confidence ... clearly this isn't the end of the crisis."

The MSCI main world equity index fell 0.3 percent, having hit a 2-year low last week.

Asian stocks fell 2.4 percent, emerging stocks .MSCIEF lost 1.5 percent while the FTSEurofirst 300 index managed to rise 0.7 percent.

Evidence suggesting Britain is flirting with recession mounted. Data showed retail sales down, house prices crumbling and companies more reluctant to hire staff than at any time in almost 15 years.

The dollar, boosted in recent weeks by signs of faltering growth outside the United States, hit a one-year high against major currencies .DXY.

"It seems the market came to the conclusion that what has driven FX markets in the past several weeks/months -- the narrowing in the expectations gap between the United States and the rest of the world -- has not materially changed," Royal Bank of Canada said in a note to clients.

The low-yielding yen rose half a percent to 107.67 per dollar a sign of investors avoiding risk.

As optimism faded, a key U.S. subprime mortgage index nearly erased a 4 point gain made on Monday with rising consumer debt, delinquencies and unemployment weighing on sentiment. The top "AAA" slice of the ABX index ended slightly up on the day.

Emerging sovereign bond spreads widened 3 basis points.

The December Bund future was steady on the day.

U.S. light crude fell 0.6 percent to $105.62 a barrel while gold slipped to $799.70 an ounce.

(Additional reporting by Jamie McGeever; Editing by Ruth Pitchford)