World stocks at 21-month low as banks plunge

Fresh credit fears swept global financial markets on Tuesday, pushing world stocks to their lowest levels since October 2006 as concerns intensified that the financial sector would have to raise more capital.

Banks tumbled across the board after a Lehman Brothers report said a pending accounting change could force Fannie Mae and Freddie Mac to raise an $46 billion and $29 billion (14.7 billion pounds) respectively at a difficult time, knocking their shares to near 16-year lows on Monday.

In Britain, shares in troubled mortgage bank Bradford & Bingley fell 20 percent to record lows, below the price of its planned rights issue, due to concerns over its future.

Fresh worries over the financial sector dealt a blow to risky assets, which have been already reeling from fears about rising inflation due to high energy costs and slowing growth.

"The crisis in the financial system, given banks are the lubricant for the economy, points to continued tight credit," said Jonathan Lawlor, head of European research at Fox-Pitt, Kelton.

"So we have a loop where tight credit leads to slower economic growth, which leads to higher losses for the financial system, which leads to capital constraints for the banks."

MSCI main world equity index fell as low as 341.35, down 1 percent, hitting its lowest since October 2006.

The index is down 20 percent from its all-time peak set in November last year, plunging into bear market territory.

The FTSEurofirst 300 index fell 2.5 percent.

SPREADING CRISIS

On Wall Street, the S&P regional bank index fell 5 percent to record low on Monday, which Bank of Scotland said highlighted a key evolution in the unravelling of the 2001-2007 global credit boom.

"Initial focus was on structured products held and marketed by investment banks and the viability of structured investment vehicles. Focus going forward is likely to be on the scale of credit impairments delivered by a deteriorating economic cycle," the bank said in a note to clients.

"High levels of leverage extended to both consumers and investors against a now depreciating asset (housing) alongside lax lending standards make a rise in default rates. The epicentre of the crisis therefore shifts from investment to commercial bank balance sheets."

The yen - which tends to rise in times of risk aversion given its low interest rates - rose 0.4 percent to 106.73 yen per dollar.

Emerging stocks fell 1.7 percent to its lowest since January. Emerging sovereign spreads were steady.

European government bonds drew in safe-haven demand, with the September Bund future up 28 ticks.

U.S. light crude rose 0.3 percent to $141.63 a barrel having dropped 2.7 percent on Monday. Gold rose to $928.00 an ounce.