GLOBAL MARKETS - Economic worries hit world stocks, sterling

By Natsuko Waki

LONDON (Reuters) - Investors cut back on risky assets on Wednesday, dumping stocks and high-yielding currencies on global credit and economic worries while they pushed sterling to a 11-1/2 year low after a Bank of England inflation report.

Wednesday's data provided fresh evidence that U.S. economic problems are spilling over to the rest of the world. Japan's economy contracted in the second quarter at the sharpest rate in seven years, reinforcing the view that the world's No. 2 economy has slipped into recession.

In the quarterly report which highlighted the possibility of a UK recession, the BoE said domestic inflation will fall below its 2 percent target in two years and warned that growth risks remained on the downside.

"The tone is clearly dovish, with the economy now expected broadly to stagnate over the next year or so," said Jonathan Loynes, chief European economist at Capital Economics.

"Against that background, we stick to the view that interest rates will eventually fall very sharply once inflation pressures finally recede. Market rate expectations therefore have scope to fall much further in time."

Sterling fell as low as $1.8737 while it hit a 11-1/2 year low on the trade-weighted index.

The MSCI main world equity index fell 0.7 percent while emerging stocks fell to a one-year low of 975.37.

The FTSEurofirst 300 index fell more than 1 percent. U.S. stock futures fell 0.2 percent, pointing to a weak open on Wall Street.