Grim economic reality hits stocks

European stocks followed Asia into sharp declines on Thursday and oil extended losses as weak U.S. data intensified fears about the impact of recession in major economies hit by the worst financial crisis in 80 years.

The euro and sterling fell against the dollar as investors braced for the European Central Bank and the Bank of England to cut interest rates by at least half a percentage point.

Euphoria after a landmark victory of Democrat Barack Obama in the U.S. presidential vote evaporated as Wednesday's data showed cuts in employment by private employers and a sharp contraction in the service sector, revealing the scale of a slowdown in the world's biggest economy.

"We're back to the grim reality of economic data showing recessionary conditions and lower earnings guidance," said Bernard McAlinden, investment strategist at NCB Stockbrokers.

"The counterbalance is interest rate cuts. We're no longer in a situation where big cuts would cause panic." MSCI world equity index fell 2.4 percent while emerging stocks lost more than 5 percent. Asian stocks fell 7 percent.

Russia's largest stock exchange MICEX halted trading of stocks for one hour after stock prices fell sharply.

BIG CUTS?

The euro fell half a percent to $1.2898 while sterling ticked down to $1.5933. The dollar rose slightly against a basket of major currencies.

Some analysts are looking for a UK interest rate cut of as much as 100 basis points and a euro zone rate cut of 75 basis points. Many say drastic action from central banks is key in restoring investor confidence.

"The more significant the banks cut rates and the more dovish related statements the better the chance of seeing equity markets stabilising and currencies rallying thereafter," BNP Paribas said in a note to clients.

"A more conservative approach could lead to substantial equity losses taking currencies with it."

U.S. crude oil lost 2 percent to $63.96 a barrel, having fallen all the way from its record high above $147 set in July.

The December bund futures fell 20 ticks ahead of the ECB rate decision.