Europe falls again as global rout resumes

LONDON (Reuters) - World markets tumbled for a second day on Thursday, hurt by concerns about the health of world economy and fears that Europe's debt crisis was waking up from a two-year siesta.

European stock markets <.FTEU3> slumped, with London <.FTSE>, Frankfurt <.GDAXI> and Paris <.FCHI> down 1.8, 1.7 and 2.4 percent by midday and Greek shares <.ATG> down 3 percent for a loss of 17 percent in a week. [.EU]

Wall Street was also expected to open sharply lower [.N], with futures prices signaling falls of 1.3 percent for the S&P 500 and 1.4 for the Dow Jones <1YMc1>, as market volatility stayed at its highest since 2011 and investors braced for a flurry of economic data and earnings.

Assets that depend on economic growth, such as shares and oil, have been hit by a raft of weak indicators from Europe at a time when other big economies including China, Japan and Brazil face their own hardships.

These come as the U.S. Federal Reserve prepares to wind down later this month the asset purchase program that has boosted markets over the past two years. Many observers doubt that new measures from the European Central Bank will make up for it.

"Equity markets are going through a growth, inflation and liquidity scare right now and we are seeing some pretty savage equity price moves," said Morgan Stanley strategist Graham Secker.

"Positioning and technical factors are driving near-term asset prices, so investors are effectively having to sell what they can."

The euro skidded to a fresh 11-month low against the safe-haven yen while euro zone peripheral bonds from Greece to Portugal and Italy to Spain saw renewed heavy selling. [GVD/EUR]

The sell-off had echoes of the zenith of the euro debt crisis and left investors scurrying for traditional safe havens.

German 10-year Bund yields -- which fall as demand for the bonds rises -- hit a fresh record low. U.S. Treasury yields were nudging 2 percent again and gold also sprang back up toward a one-month high.

EURO ZONE ON ALERT

As well as meek global growth, European markets have been rattled by fears that the fragile government in Greece, one of the countries at the center of the region's debt crisis, could fall and leave an anti-bailout party to take the reins in Athens.

Greek 10-year bond yields jumped 110 bps again to 8.94 on Thursday as their biggest sell-off since October 2008 continued. [GVD/EUR]

One of Greece's euro partners told Reuters late on Wednesday that Athens was changing its mind about quitting its EU/IMF aid program next year, while a source said on Thursday the ECB would make it easier for Greek banks to tap its cheap funding.

But the sell-off was not confined to Greece. Portuguese , Spanish and Italian 10-year yields rose too, jumping 25-45 bps to 3.75, 2.45 and 2.31 percent respectively.

They all pulled further away from Germany's benchmark Bunds , which sank to new low yield of 0.75 percent.

German Chancellor Angela Merkel told parliament in Berlin on Thursday that the euro zone must not drop its guard.

"The crisis has not yet been permanently and sustainably overcome because the causes, regarding the set-up of the European economic and currency union and the situation of individual member states, haven't been eliminated," she said.

GROWTH GLOOM

In the currency markets, the U.S. dollar <.DXY> was back on a firmer footing after one of its sharpest drops of the year on Wednesday as the Japanese yen , which tends to be favored during market turbulence also made gains. [FRX/]

Only a month ago, markets <0#FF:> were thinking the Federal Reserve could raise U.S. rates as early as June next year, but after the stormy last few weeks traders have pushed back their expectations to the first quarter of 2016.

Wall Street stocks have been slammed too. The benchmark S&P 500 <.SPX> and the MSCI 45-country world index <.MIWD00000PUS> have lost almost 10 percent in the last three weeks. U.S. stocks are still up 170 percent since the depths of the financial crisis in 2009 though.

As U.S. trading began, the dollar's index was at 85.188, flat on the day.

Oil and commodity prices were back under pressure, though.

Brent crude , which has fallen more than 28 percent since June amid slow demand and signs that producers are not cutting output, hovered at a 4-year low of $82.93 a barrel as U.S. crude slumped to $80.45.

Safe-haven gold , meanwhile, was within touching distance of a one-month high at $1,242, while growth-sensitive copper fell 1.25 percent after shedding 2.3 percent in the previous session, its biggest daily drop since March.

(Additional reporting by Harpreet Bhal in London; editing by Anna Willard)

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