By Jeremy Gaunt, European Investment Correspondent
LONDON (Reuters) - Financial markets began the monthpressured on all sides on Monday with Hurricane Gustav liftingthe price of oil, economic fear driving equities lower andgloom about Britain's downturn knocking sterling to a 12-yearlow.
Investors also appeared unhappy with Commerzbank's $14.5billion purchase of Dresdner Bank from Allianz.
The dollar was generally stronger and euro zone governmentbond yields fell as investors bought into safe-haven plays.U.S. markets were closed for the Labour Day holiday.
Crude oil prices rose around $1.50 a barrel as Gustav shutdown nearly all offshore oil output in the U.S. Gulf andthreatened the Louisiana coast.
Prices pared earlier sharp gains, however, as traderspondered whether the Category 3 storm would leave lastingdamage. Nearly 2 million people have fled the coast.
"This is definitely a dangerous storm but I think most ofthe market is in a wait-and-see mode, waiting to see (if thereare) disruptions to oil facilities and pipeline infrastructurebefore they make a big move," said Gerard Burg, a commoditiesanalyst at the National Bank of Australia in Melbourne.
U.S. light crude for October delivery was up $1.47 at$116.93 a barrel, having briefly surged above $118 a barrel.
While higher crude prices generally weigh on stocks,investors are mostly concerned at the moment with worries aboutthe depth of a global economic slowdown.
This was clearest on Monday on currency markets, whereBritain's pound fell to a 12-year low on a trade-weightedbasis. It was also down three-quarters of a percent at around$1.80, compared with more that $2 in July.
The declines followed Chancellor Alistair Darling'scomments that the UK's economic downturn is likely to be deeperand last longer than originally feared and might turn out to bethe worst for 60 years.
"Most people believed that things were probablydeteriorating faster in the UK than the government wasadmitting, but the fact that we've seen the chancellor come outand admitting that things are far worse have put sterling underpressure," said Ian Stannard, senior currency strategist at BNPParibas.
TOO MUCH
Equity markets, in the meantime, were kicking off the monthon a down note, generally gloomy about the economic outlook.
European shares fell sharply in early trade, led by banksas Commerzbank tumbled more than 6 percent after agreeing itsdeal to buy Dresdner.
The FTSEurofirst 300 index of top European shares was downaround 0.8 percent, starting the month off on a weak note afternotching up a gain of 1.2 percent in August, only its secondmonthly gain in 10 months. Allianz was down nearly 1 percent.
Investors appeared to believe the deal was too expensive."On a first glance we don't like the transaction at all," DZBank said in a note.
Earlier, Japan's Nikkei stock average shed 1.8 percent asHonda Motor Co and other exporters fell on worries about theeconomy and a slightly stronger yen.
The benchmark Nikkei shed 238.69 points, completely erasinglast week's gains, to finish at 12,834.18. The broader Topixlost 1.9 percent to 1,230.64.
Euro zone government bond prices shot higher after thegloomy comments from Britain's Darling triggered concern that asimilar outlook would be felt throughout the euro zone.
Two-year yields fell 8 basis points to 4.041 percent while10-year yields were 3 basis points down at 4.141 percent.
