source: www.reuters.com

Tue Nov 25, 2008 5:16am EST

By Natsuko Waki

LONDON (Reuters) - European stocks fell more than 1 percent on Tuesday and the low-yielding yen rose broadly as euphoria surrounding the U.S. rescue of Citigroup gave way to concerns about sharply deteriorating major economies. Washington's announcement late on Sunday to shoulder most losses on about $306 billion of Citi's risky assets and inject new capital boosted world stocks by 6.6 percent on Monday.

However, investors were quick to take profits on stocks as well as oil, worrying that more banks might be forced to seek government help and that the rescue plan was unlikely to change the fact that the world economy is slowing fast.

News that top global miner BHP Billiton walked away from its hostile offer for rival Rio Tinto and major insurer AXA cut its 2008 underlying profit outlook reminded investors of a tough environment facing corporates.

Furthermore, the World Bank said China's growth -- once seen as the engine of the world economy -- could slow to 7.5 percent in 2009, its slowest pace of expansion since 1990, due to the intensifying impact of global financial turmoil.

"Given the scale of the rally in risk assets (on Monday) investors are reassessing the situation and are less willing to chase the rally higher," BTM-UFJ currency economist Lee Hardman said.

"The underlying conditions are not conducive for further gains...in risk assets, with below-trend growth across the globe and financial markets in a severe state of distress."

The FTSEurofirst 300 index of leading European shares fell 1.6 percent, after rallying nearly 9 percent on Monday -- its second biggest one-day percentage rise on record.

Shares in Rio Tinto fell 38 percent, with the basic resource shares falling nearly 9 percent. AXA shares fell 13.5 percent.

A 3 percent rise in Asian stocks helped MSCI world equity index post a 0.4 percent gain. Emerging stocks rose 2.2 percent.

U.S. crude oil fell 3.5 percent to $52.46 a barrel after rising more than 9 percent on Monday.

The December bund futures rose 25 ticks as European shares slipped. The low-yielding yen rose more than 1 percent to 95.81 per dollar while the dollar rose 0.5 percent against a basket of major currencies.

U.S. data due later includes a preliminary reading for third-quarter growth. The U.S. economy is expected to have contracted 0.5 percent in the three months ending September.

Interest rate futures are fully pricing in the Federal Reserve to cut interest rates by half a point to 0.5 percent in December.

"Although we expect the Fed to lower its Fed fund target rate to zero in January next year, the market has not fully priced in the Fed's zero interest rate policy," JP Morgan said in a note to clients. "Therefore, any negative surprises from the U.S. releases should heighten speculation for more aggressive Fed cuts."

(Additional reporting by Jessica Mortimer; Editing by Victoria Main)