Renewed credit fears drag down stocks

Renewed credit worries knocked down global stocks yesterday amid new fears that the US government will need to prop up the two largest mortgage finance companies, sending investors to the relative safety of government debt.

The US dollar slipped against the yen and euro, weighed by relatively steady oil prices, prompting investors to take profits on the greenback's recent sharp rally.

Oil see-sawed between slight gains and losses, hovering around $113 a barrel, as a tropical storm looked set to avoid major US oil and gas infrastructure in the Gulf of Mexico, while investors continued to eye the tense situation in Georgia.

Equity investors also fretted over a report from The Wall Street that said some analysts are girding for investment bank Lehman Brothers to announce a third-quarter loss of $1.8 billion or more.

The S&P financial index fell 2.5 per cent.

Before 1 p.m., the Dow Jones industrial average was down 148.51 points, or 1.27 per cent, at 11,511.39. The Standard & Poor's 500 Index was down 14.66 points, or 1.13 per cent, at 1,283.54. The Nasdaq Composite Index was down 32.05 points, or 1.31 per cent, at 2,420.47.

European shares fell slightly in a volatile session dominated by a brief pick-up in oil prices, which lifted energy shares. But a firmer euro that dented retail and auto stocks quashed the early boost from crude oil.

Auto stocks ranked among some of the biggest individual drags, while banks were the worst performing sector on the broader European market.

The FTSEurofirst 300 index of leading European shares fell 0.09 per cent at 1,189.15 points.

Declining crude prices eroded some of the gains in oil and gas shares, but provided growing relief that inflationary pressures are receding after crude's record highs around $147.

Eurozone debt extended last week's rally as evidence the region's economy was losing momentum boosted expectations that the European Central Bank would keep interest rates on hold in the near term before eventually loosening policy.

A similar view on rates has taken hold in the US, as declining energy prices ease fears of inflation.

The benchmark 10-year US Treasury note gained 8/32 to yield 3.8 per cent. The 30-year US Treasury bond rose 18/32 to yield 4.44 per cent.

Fund futures in Europe rose at one point to their highest since mid-May, while yields, which move inversely to prices, touched similar lows.

Oil prices slipped as worries about a brooding tropical storm dissipated.

US light sweet crude oil rose 18 cents to $113.95 per barrel.

US gold futures rose following the previous session's nearly three per cent tumble, trading near $800 an ounce.

Spot gold prices rose $16.70 to $802.20 an ounce.