Asian stocks hit despite Senate bailout approval

By Rafael Nam

HONG KONG (Reuters) - Asian stocks fell and investors sought the relative safety of government debt on Thursday after the U.S. Senate's approval of a massive bank bailout plan failed to dispel the deepening worries about the global economy.

Doubts about whether the U.S. House of Representatives will now approve the revised $700 billion rescue plan for the financial system also weighed, after their unexpected rejection of an initial package on Monday sent global markets reeling.

However, the dollar remained better bid against other major currencies given expectations the financial crisis is taking a toll on European financial firms, and more broadly on worldwide growth, which could lead to interest rate cuts elsewhere.

Shares were set also to open lower in Europe, where investors are bracing for comments on the financial crisis from the European Central Bank. The ECB meets later in the day amid expectations it will keep interest rates on hold at 4.25 percent.

"Even if the bill is passed, worries remain over the global economic outlook so financial markets are unlikely to stabilize," said Masamichi Adachi, a senior economist at JPMorgan Securities in Japan.

"It's a completely different world now. All the things U.S. authorities are doing now are simply aimed at preventing a global meltdown. They might trigger a short rally in markets but won't offer a fundamental solution," he said.

The MSCI index of Asia-Pacific stocks outside Japan fell 1.2 percent, while Tokyo's Nikkei average dropped 1.9 percent to end at its lowest close in three years.

Stocks in South Korea, Hong Kong, Singapore and Taiwan fell more than 1 percent each, while Australian shares fell 0.6 percent.

STEEP STOCK SLIDE

Asian stocks have dropped nearly 40 percent this year, after a miserable September that saw shares drop 17 percent in the biggest monthly decline since the financial crisis a decade ago.

The inability to gain traction on Thursday came even after the U.S. Senate voted 74 to 25 in favor of a revised bailout package aimed at reinvigorating frozen worldwide credit markets and interbank lending.

The U.S. House of Representatives is expected to vote on the bill on Friday, and investors appeared unwilling to bet on approval yet despite the addition of sweeteners such as a tax cuts and extended federal protection for bank deposits.

With appetite for risk eroded, investors opted for the relative safety of government bonds. The U.S. Treasury 10-year note erased earlier losses to edge up, sending yields down to 3.71 percent, compared to 3.74 percent late in U.S. trade on Wednesday.

Gold also advanced, trading at $871.80 an ounce, up from a notional U.S. close of $868.75 on Wednesday.

Continued signs of weakness in the U.S. economy -- including data on Wednesday showing U.S. factory activity shrank in September to its lowest since the 2001 recession -- bode ill for a global economy that depends in good measure to the largesse of the U.S. consumer.

"Market expectations for Asian growth was a bit too strong at the start of the year. Asian currencies will weaken against the dollar," said Kit Wei Zheng, an economist at Citigroup in Singapore.

"The weakness in the rest of the world has not been priced in and currencies will move to reflect that in the coming months. It will be a story of the rest of the world weakening rather than a rebound in the U.S. dollar."

DOLLAR FIRM

The dollar index, a gauge of performance against six major currencies, rose 0.3 percent to 79.965. That was near a one-year peak struck last month but off a high of 80.025 hit before the Senate vote.

The euro dipped 0.4 percent to $1.3954 and was near a one-year low of $1.3882 struck last month, amid expectations the European Central Bank still has room to cut rates at some point, which would erode the euro's yield advantage over the dollar.

The currency has also slid as Europe is becoming a point of focus for global investors as the credit crisis hits European financial institutions such as Fortis, which was rescued by a 11 billion euro bailout on Sunday.

Oil was up 5 cents at $98.58, down from earlier gains to as much as $100.37 as concerns remained over weakening demand and growing supplies in the United States.

(Editing by Lincoln Feast)