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Shares tumble worldwide; ECB raises rates

LONDON - A global sell-off knocked world shares to a five-month low on Thursday as surging oil fanned concerns about inflation and slowing growth with investors looking ahead to a key U.S. jobs report.

The European Central Bank became the first G7 central bank to raise interest rates since the credit crisis erupted last August, raising the euro zone's benchmark cost of borrowing to 4.25 percent.

Investors are keen to hear if more rate rises are in the pipeline from ECB President Jean-Claude Trichet who gives a news conference at 1230, the same time U.S. non-farm payrolls are released.

"We are now waiting for Trichet... if he talks about further upside risks to inflation then everybody will assume that further rate hikes are possible," said Tom Vosa, head of market economics at nabCapital.

Tightening comes as the global economy struggles with the chilling effects of almost a year of financial turmoil.

"This has been a summer of thunder storms that have been building up for some time," said Justin Urquhart Stewart, investment director at Seven Investment Management.

"Only now are people beginning to realise quite how dark this particular storm is looking, but it's been a long time coming."

The FTSEurofirst 300 index was down 0.7 percent, having hit a level not seen since July 2005. MSCI's main world equity index

fell 0.5 percent to its lowest since Jan. 23.

The gloom was all-pervasive, with Tokyo stocks setting their longest losing streak in more than half a century.

On Wall Street, the Dow has sunk into a bear market -- a fall of 20 percent from peaks. On Thursday, U.S. stock futures were indicating a weaker open on main indexes later.

In the currency market, the euro benefited from expectations for more interest rate hikes from the ECB, while the dollar fell as low as $1.5902 per euro.

A weaker dollar -- which policymakers increasingly worry is inflationary -- pushed crude oil to fresh record highs above $145 a barrel.

A senior Japanese government official said leaders from Group of Eight rich nations will discuss concerns that a weak U.S. dollar is a contributing factor to oil prices when they gather next week in Japan.

Emerging sovereign spreads widened 3 basis points while emerging stocks fell 1.8 percent.

The September Bund future fell 15 ticks. Safe-haven government bonds, which usually benefit from risk aversion, fell because investors anticipated higher yields. A quarter-point interest rate hike and hawkish comments from Sweden's central bank also depressed European government bonds.

Gold rose to $945.70 an ounce, its highest in almost 2-1/2 months.