Global stocks at 5-1/2 year lows

By Carolyn Cohn

LONDON (Reuters) - World stocks dropped to 5-1/2 year lows and oil hit 22-month troughs as investors reacted to dire Federal Reserve warnings on the economy and fears about the viability of major U.S. auto makers and bank giant Citigroup.

Federal Reserve officials slashed economic growth forecasts through 2009, with the lower range of the Fed's central tendencies forecasting the U.S. economy could shrink by 0.2 percent.

At least one among household names General Motors Corp, Ford Motor Co and Chrysler LLC is at risk of bankruptcy if a last-minute bail-out plan fails.

The plight of U.S. automakers highlighted the increasing damage which the world's financial crisis is inflicting on the real economy.

"We have contracting economic growth, falling corporate profits, and increasing unemployment which is filtering through to every part of the economy," said Henk Potts, investment manager at Barclays Stockbrokers.

The MSCI world equity index fell 2.3 percent to 197.90, its lowest since May 2003, driven lower in Asia after data showing Japan's exports to Asia fell for the first time in six years.

European shares also approached their lowest since June 2003, with the FTSEurofirst 300 index of leading European shares dropping 3 percent, following losses of 5 percent or more on Wall Street.

European banks remained under pressure after Citigroup Inc faced a crisis of confidence on Wednesday as investors questioned the survival prospects of the U.S. banking giant.

"Having seen Lehman and Merrill Lynch fall by the wayside this year, the sight of another major such as Citigroup struggling will prove a bitter pill to swallow," said Chris Hossain, senior sales manager at ODL Securities.

Oil fell by more than $1 a barrel to 22-month lows at $52.49, as the slumping global economy hit demand.

The two-year U.S. Treasury yield hit a record low of 1.06 percent on expectations of a 50 basis point U.S. rate cut to 0.50 percent next month.

Euro zone government bond futures rose more than half a point to their highest since March 2006 at 120.36.

The dollar dropped 0.77 percent to 95.20 against the safe-haven yen, but edged up against the euro to $1.2504.

Emerging markets suffered from falling commodity prices and global demand.

The MSCI emerging equities index dropped 4.55 percent to 467.32. Russian stocks on the MICEX exchange fell 7.5 percent before trading was suspended for an hour.

(Additional reporting by Simon Falush and Atul Prakash; Editing by Toby Chopra)