Deep-rooted jitters about the U.S. debt rating cut sent world stocks tumbling towards 11-month lows on Monday, overshadowing relief that the European Central Bank was buying bonds of strugglers Italy and Spain.

Having seen some $2.5 trillion wiped off its global share values last week, MSCI's all-country world stock index was down a further one percent.

Wall Street, meanwhile, looked set to add to the rout with S&P 500 futures down around 2.5 percent.

European share measured by the FTSEurofirst 300 index were down 2 percent after earlier registering gains on the ECB action, intended to take the heat out of the spreading euro zone debt crisis.
Since July 29, European shares as measured by MSCI have lost $932 billion, more than the combined economies of Greece, Ireland and Portugal.

ECB buying was lifting some peripheral bond prices. Yields on five-year Italian and Spanish bonds were down around 70 basis points, spreads against German debt narrowed and the cost of insuring Spain and Italy against default dropped.

But safe-haven buying sent gold soaring to a new record above $1,700 an ounce.

Investors were seemingly unimpressed by weekend talks between industrialised countries aimed at safeguarding the smooth functioning of financial markets following agency S&P's cut in its U.S. rating late on Friday to AA-plus from AAA.

"It won't be long now before other ratings agencies follow suit, considering the state of the U.S.' finances. One thing is for certain, and that's that volatility will continue to remain high, making trading conditions difficult," said Angus Campbell, head of sales at Capital Spreads.

Moody's repeated a warning on Monday it could downgrade the United States before 2013 if the fiscal or economic outlook weakened significantly, but said it saw the potential for a new deal in Washington to cut the budget deficit before then.

EASING PAIN

The ECB's bond moves followed criticism that the bank had not addressed pressure on Spain and Italy when it bought Portuguese and Irish debt last week.
Indeed, some of Monday's stock weakness was balmed on fears of growing domestic opposition in Germany over Chancellor Angela Merkel's policy towards resolving the euro zone debt crisis.

Traders said Monday's buying was focused on the 5-year sector of the curve, where Italian yields were around 4.7 percent and Spanish equivalents dropped to around 4.6 percent.

"They're doing 20 to 25 million (euro) clips and they're spreading it around the market," said a trader. "We expect them to do billions today."

The euro fell against a dollar that recovered some of its earlier losses against a basket of major currencies .

Some analysts said the euro would struggle ahead as the ECC bond purchases, while adding temporary liquidity to stressed debt markets, would do little to improve the fiscal problems in the region.

"Even if the ECC buys Italian bonds, private investors will just sell and offload their Italian risk ... The ECC will have to buy those bonds constantly just to keep yields stable," said Richard Falkenhall, currency strategist at SE in Stockholm.