World stocks tumble to 5-year low, dollar jumps

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Global stocks tumbled to a new five-year low on Friday and demand for the relative safety of government bonds and low-yielding currencies soared as economic decline and corporate damage continued to grip investors.

MSCI's all-country world index was down 2.8 percent after earlier hitting a level not seen since August 2003. The dollar hit a two-year high against major currencies.

European shares were down around 4 percent and Japan's Nikkei average .N225 plunged 9.6 percent. Emerging markets were hit hard again, with MSCI's index for the asset class .MSCIEF down 4.9 percent.

The emerging market stock index has now lost close to 14 percent this week and has wiped out all its massive gains from the last four years.

"Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate," said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ in Tokyo.

The financial crisis has now spread far beyond the banking sector, with electronics maker Sony Corp and U.S. online retailer Amazon.com Inc cutting their forecasts in the face of weakening consumer demand.

South Korea led the decline on Friday with shares falling 11 percent, leading to a brokerage industry group asking its members to stop selling shares to save the country from more losses.

In Europe, the FTSEurofirst 300 index was down 4.1 percent having earlier hit its lowest level since mid-2003.

Hammered banks led the decline, with HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) down 8.3 percent, Santander (SAN.MC: Quote, Profile, Research, Stock Buzz) off 6.5 percent and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) shedding 2.7 percent. The European banks sector dropped 5.4 percent.

"Just when we thought it was safe to get back in the water the markets remind us how choppy they can be," said Felix Riley at ChoiceOdds.

"For every silver lining there is a cloud right now and the fear of more systemic failure in the global economic machine haunts every person wishing to go long."

Earlier, Japan's Nikkei slid 9.6 percent or 811.90 points to 7,649.08, a 5-1/2 year closing low. The benchmark lost 12 percent in the week and has fallen 50 percent so far this year.

DOLLAR, YEN SOAR

The dollar hit two year highs versus a basket of currencies .DXY and the euro and sterling hit a five-year low, reflecting heavy dollar repatriation.

The euro was at $1.2644, just above the low. Sterling hit a 5-year trough at $1.5834 and was later at $1.5863.

"Its extreme risk aversion and deleveraging of risky assets ... and we are seeing safe-haven flows into dollar and yen," said Lee Hardman, currency economist at BTM-UFJ.

The dollar hit a 13 year low of 94.79 against the Japanese yen and was later at 95.07 yen.

Euro zone government bonds were higher. Two-year bond yields were 7 basis points lower at 2.694 percent and 10-year yields lost 6 basis points to 3.725 percent.

(Additional reporting by Rebekah Curtis, editing by Mike Peacock)