The euro fell to a fresh four-year low on Wednesday after a German move to sharpen financial regulation raised doubts about the prospect for global recovery, pulling down Asian stocks, metals and crude oil.

The U.S. dollar index rose to a 14-month high as investors sought safer havens for their cash, including in the yen and U.S. Treasuries.

European stock markets were seen falling sharply at the open. They had closed on Tuesday before Germany announced its unilateral ban on speculative selling of some securities.

The move, coupled with strengthening financial regulation in the United States, roiled financial markets as investors stampeded out of riskier assets and worries spread that the global economic recovery could be derailed.

Britain's FTSE 100 <.FTSE> was expected to open as much as 1.6 percent lower, financial bookmakers said. By 0601 GMT, stock futures for the STOXX Europe 50, Germany's DAX and France's CAC-40 had dropped 1.1 to 2.2 percent.

If you combine this new regulation in Germany with all the other negative headlines we've been having in the past few days, most probably European markets will react negatively, said Pierre Faddoul, a credit analyst at Aberdeen Asset Management in Singapore.

Germany said it was banning naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's 10 leading financial institutions.

In naked short selling, a trader sells a financial instrument short, betting that its price will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.

Germany's lack of coordination with any other countries, including euro zone members, underscored how the measures may backfire and so unsettle, rather than calm, markets already nervous about the debt crisis, analysts said.

Germany just switched off the financial lights in Europe, said a senior forex trader at a European bank in Singapore.

The euro fell as low as $1.2143 on trading platform EBS, its weakest level since April 2006 and taking it losses so far in 2010 to more than 15 percent.

It later recovered to around $1.2208, but the bounce could be short-lived.

Stocks and CDS trading are now regulated. The government bond market is supported by the European Central Bank's buying. So investors have no place but the currency market to express their views on Europe, said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital.

DOLLAR, YEN BENEFIT

The MSCI index of Asia-Pacific shares outside of Japan <.MIAPJ0000PUS> dropped over 2 percent to a three-month low. It has fallen about 4.3 percent since the start of the week.

Japan's Nikkei average <.N225> fell as much as 1.8 percent, also to a three-month low, on the regulation worries and as the weak euro dragged on exporters. It later recovered but still closed down on the day by 0.5 percent for its weakest finish in 11 weeks.

High-yielding currencies like the Australian and New Zealand dollars also fell as investors reduced their exposure to riskier investments.

Under other circumstances, the naked short selling ban is actually a move that might be taken positively by markets, said Hideyuki Ishiguro, a strategist at Okasan Securities.

What markets really wanted to hear from authorities, especially in Europe, was some sort of statement strongly in support of the euro framework. Instead, there was this -- and the disappointment set off selling.

The Australian dollar fell to an eight-month low of $0.854, with charts suggesting more losses as investors dumped high-yielding currencies. The kiwi was down 0.6 percent at $0.6854

Australian shares <.AXJO> also hit an eight-month low.

Industrial metals fell as fears of tighter regulations threw doubts on hopes for a global economic recovery.

London three-month copper dropped $135 to $6,565 a tonne, or over 2 percent. Zinc prices in Shanghai fell more than 5 percent, while London nickel dropped 4.7 percent on the fall in the euro.

Crude oil futures slid to a seven-month low, reflecting falls in other markets.

The flight to assets perceived as safer bets in time of uncertainty boosted the dollar and the yen.

The dollar index, which tracks the U.S. unit's performance against a basket of major currencies, rose to a 14-month high of 87.458 <.DXY> before slipping back to 87.135.

Treasuries also rose during Asia time. The yield on the benchmark 10-year note eased to 3.33 percent from 3.49 percent late on Monday.

Gold initially gained on a safe-haven bid, but then fell back on fears of a correction. Spot gold hit an intraday high of $1,227.10 an ounce before falling to $1209.20 by 0524 GMT, down $10.50 from New York's notional close on Tuesday.

It struck a record of $1,248.95 an ounce on Friday on fears that euro zone austerity measures could impede, rather than aid, a recovery, but analysts say the market may be technically overbought.

(Editing by Neil Fullick)

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