Oil prices and stocks around the world tumbled on Monday after a jump in troubled loans at Bank of America and renewed signs of economic weakness cooled investors’ optimism the worst of a global slowdown was over.

The U.S dollar rallied broadly to trade at one-month highs as the slide in worldwide equity markets boosted safe-haven demand for the greenback, U.S. and European government debt and gold.

Bank of America stock shed 17 percent after reporting its purchase of Merrill Lynch & Co helped to more than double first-quarter profit, but credit quality deteriorated sharply, hurt by a flagging economy and growing unemployment.

Also weighing on sentiment was a key gauge of future economic activity, which fell for the third month in a row in March, showing the U.S. recession may persist through summer.

In another sign of weakness, Germany fell deeper into recession in the first quarter, the Bundesbank said, fueling expectations of a record contraction in gross domestic product.

Most major European and U.S. stock indexes fell more than 3.0 percent as analysts questioned the prospect for corporate earnings.

Shares of Citigroup Inc fell 16 percent after Goldman Sachs said credit losses at the bank continued to grow at a rapid rate, putting a damper on earnings expectations.

“People are starting to peel the results back and say wait a second,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. “Can (the results) continue in the next quarter?”

At 1 p.m., the Dow Jones industrial average was off 219.04 points, or 2.69 percent, at 7,912.29. The Standard & Poor’s 500 Index was down 28.93 points, or 3.33 percent, at 840.67. The Nasdaq Composite Index was down 54.10 points, or 3.23 percent, at 1,618.97.

Banking shares took the most points off an index of leading European companies, sparked by Bank of America results.

The FTSEurofirst 300 index of top European shares closed 3.5 percent lower at 786.12 points, the biggest daily percentage drop since March 30.

Deutsche Bank lost 8.6 percent, Barclays fell 7.9 percent and BNP Paribas 6.6 percent.

The DJ STOXX Banks Index fell 5.5 percent.

Oil slid more than 8.0 percent to about $46 a barrel, depressed by a rising dollar and growing caution about the pace of any economic recovery and its impact on oil demand.

U.S. crude for May delivery was down $3.95 at $46.38 a barrel. Brent crude for June fell $3.09 to $50.26.

President Barack Obama said on Sunday the U.S. economy remained under strain and his top economic adviser tempered hopes for a speedy recovery that have driven Wall Street to six straight weeks of gains.

Managing Director Dominique Strauss-Kahn of the International Monetary Fund was quoted Sunday as saying the IMF would cut its global economic forecasts this week and that he did not expect a recovery to start unitl the first half of next year.

“Near term, we don’t see any supportive factors for the oil market,” said Harry Tchilinguirian, oil analyst at BNP Paribas in London. “We have not yet turned the corner on the economy, oil demand is very weak and inventories are high.”

The U.S. dollar rallied, boosted by volatility in global equity markets and expectations the U.S. economy will rebound from recession sooner than other regions.

“There’s no doubt among investors that the U.S. will be the first to get out of this recession,” said Matt Esteve, a currency trader at Tempus Consulting in Washington. “As stocks around the globe move lower, we are seeing a re-emergence of risk aversion and the dollar gets a boost.”

The dollar rose against a basket of major currencies, with the U.S. Dollar Index up 0.82 percent at 86.604. Against the yen, the dollar fell 1.20 percent at 97.94.

The euro fell 0.83 percent at $1.293.

Gold rose about 2.0 percent, with spot gold prices rose $17.25 to $885.15 an ounce.

U.S. and euro zone government bonds rallied as a steep fall in equities helped underpin appetite for less risky fixed-income assets.

Fears about the financial sector were also stoked by a blog which said it had obtained the results of “stress tests” on the health of the top 19 U.S. banks. A spokesman said the U.S. Treasury Department has not received results.

“It’s a pure risk aversion type day today … it’s all about the bond market reacting to very weak equities,” said John Davies, fixed-income strategist at West LB.

The benchmark 10-year U.S. Treasury note rose 26/32 in price to yield 2.86 percent. The 2-year U.S. Treasury note rose 3/32 to yield 0.93 percent.

Asian stocks edged higher. The MSCI index of Asia-Pacific shares outside Japan was up 0.7 percent and Japan’s Nikkei average drifted up 0.2 percent.

April 20 (Reuters)

World stocks fell on Monday as optimism after Britain’s multi-billion rescue plan gave way to concerns about the banking sector after Royal Bank of Scotland reported the biggest ever loss in UK corporate history.

The euro tumbled after Standard & Poor’s cut Spain’s credit rating, following its downgrade of Greece last week. Oil fell 6 percent below $35 a barrel, hit by worries about weakening energy demand in a slowing economy.

Britain will allow banks to insure against steep losses and guarantee their debt to stop the credit crunch pushing the economy into a deep slump. The plan raises the government’s stake in RBS, which said it lost over 20 billion pounds last year, sending shares down nearly 70 percent.

“Whilst today’s measures will be widely welcomed, significant risks remain,” said Keith Bowman, equity analyst at Hargreaves Lansdown.

“All in all, should these measures fail, a further ratcheting-up of bank sector nationalization in order to force lending would appear to be the next step, a conclusion seen beyond all possibility just 12 months ago.”

The FTSEurofirst 300 index of leading European shares fell 2 percent, reversing gains of more than 1 percent earlier. The MSCI world equity index fell 0.8 percent, after making its biggest weekly loss since late November last week.

Emerging stocks fell 0.6 percent. UK banking woes knocked sterling to a two-week low of $1.4452 .

EURO AND DOWNGRADES

S&P cut Spain’s long-term sovereign credit ratings to AA+ from AAA, after it downgraded Greece last week and gave recent warnings on Ireland and Portugal. Worries about European government debt burdens have been growing as countries fund packages to boost local economies.

“It’s a theme in general … and it will continue to run for a while. Looking at the fiscal balances in Europe, that’s where the economic crisis is hurting at the moment – Ireland and Southern Europe,” said Niels From, chief analyst at Nordea in Copenhagen.

The euro fell 1.4 percent to $1.3139 . The dollar fell 0.7 percent to 90.31 yen while it rose 0.7 percent against a basket of major currencies.

The yield premium investors sought for holding the 10-year Spanish benchmark bond compared with the more liquid German government bond held at 114 basis points, having hit a record 122 bps earlier.

U.S. crude oil fell 6.2 percent to $34.25 a barrel, pressured by concerns about weakening oil demand, as well as signs of a resolution of a gas row between Russia and Ukraine and a ceasefire between Israel and Hamas in Gaza.

The March bund future fell 52 ticks.

LONDON, Jan 19 (Reuters)