Shares plunge on global growth, bank fears; U.S. yields tumble

By Sam Forgione

NEW YORK (Reuters) - Stock indexes worldwide tumbled on Thursday on fears over the health of the global economy, with banking shares slumping on both sides of the Atlantic, while safe-haven 10-year Treasury yields hit their lowest since 2012.

Investors fear that the negative interest rates employed by a growing band of central banks to boost economic growth are now undermining the health of banks.

The U.S. benchmark S&P 500 stock index was 1.5 percent lower and the FTSEurofirst 300 index of top European shares was down 3.39 percent to its lowest level in two and a half years. [.N]

The U.S. dollar slid to its lowest against the safe-haven yen since October 2014 of 110.985 yen, and was on track for its worst week against the Japanese currency since 2008 on the fears over the health of the global economy. [USD/]

The decline in stocks and the dollar came even as Fed Chair Janet Yellen sought to reassure investors in Congressional testimony that the Fed will remain flexible in its approach.

However, the markets already do not expect the Fed to raise rates further this year, compared with Fed forecasts that still point to more tightening.[L2N15Q1G6]

"We are watching developments very carefully," Yellen told the U.S. Senate Banking committee. "I would say there is always some chance of a recession in any year. But the evidence suggests that expansions don't die of old age."

Bank stocks in Europe fell more than 6.0 percent, making them the worst-performing sector and widening their losses for the year to about 28 percent. Disappointing results from Societe Generale dragged down shares of France's second-biggest bank by 13 percent, compounding fears.

U.S. bank stocks were also hit, with the S&P financial index dropping 2.9 percent. Concerns over profitability in a low-growth, low-interest rate environment have knocked confidence in the banking sector this week, particularly in Europe.

"The key driver is this immense pessimism in asset markets, unwillingness to hold anything but the safest assets," said Steven Englander, managing director and global head of G10 FX strategy at Citigroup.

U.S. TEN YEAR TREASURY YIELD AT LOWEST SINCE AUG 2012

Yields on benchmark 10-year U.S. Treasury notes hit 1.53 percent, their lowest level since August 2012, on the worries over global growth and the effectiveness of central bank policy.

"The central banks have been taking extraordinary policy actions in the last several years...and now we're seeing that it hasn't been as effective as everyone had been assuming," said Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts.

"When you add in the fact that the European banking system is under serious threat right now, you could actually see a path to the kind of systemic crisis that we had in 2008."

MSCI's all-country world equity index, which tracks shares in 45 nations, was last down 4.92 points, or 1.37 percent, at 353.16.

The Dow Jones industrial average was last down 312.63 points, or 1.96 percent, at 15,602.11. The S&P 500 was down 30.51 points, or 1.65 percent, at 1,821.35. The Nasdaq Composite was down 50.93 points, or 1.19 percent, at 4,232.66.

Europe's broad FTSEurofirst 300 index was last down 3.16 percent at 1,202.22.

Oil prices fell amid record U.S. crude inventories, worries about the demand outlook and a Goldman Sachs forecast that prices would remain low and volatile until the second half of the year.

Brent crude was last down 65 cents, or 2.11 percent, at $30.19 a barrel. U.S. crude was last down $1.05, or 3.83 percent, at $26.4 per barrel.

Safe-haven asset gold surged to its highest in a year. Spot gold prices were last up $49.37, or 4.12 percent, at $1,246.48 an ounce.

(Additional reporting by Clara Denina, Simon Falush Kit Rees and Alistair Smout in London, Dion Rabouin, Tariro Mzezewa in New York, and Abhiram Nandakumar in Bengaluru; Editing by Bernadette Baum and Clive McKeef)