World stocks and the euro fell on Monday while safer government bonds rose as dismal Japanese growth data and fresh concerns about the financial sector fanned worries about the deteriorating global economy.

Data showed Japan's economy sank deeper into recession with its worst quarterly contraction in 35 years, weighing on risky assets and supporting safer instruments such as bonds and the yen.

Financial shares were one of the underperforming sectors in Europe after part-nationalized Lloyds Banking Group (LLOY.L) said on Friday its HBOS unit made a hefty loss last year, causing its shares to fall by a third. Lloyds erased early losses on Monday however to trade almost flat on the day.

At a weekend meeting in Rome, G7 finance ministers and central bankers said they would do all they could do to fight recession but their statement lacked specifics to tackle the worst financial crisis in 80 years.

The Japanese economic (data) provides the backdrop today and there are persistent concerns about financials after Friday's events (at Lloyds), said Jonathan Lawlor, senior analyst at Fox-Pitt, Kelton.

World stocks, measured by MSCI .MIWD00000PUS, fell 0.7 percent. The FTSEurofirst 300 index of leading European shares .FTEU3 lost 0.8 percent. U.S. markets are closed for a national holiday.

Legal & General (LGEN.L) fell as much as 22 percent to a 10-year low before trimming losses after the Financial Times reported that the life insurer was in talks with the Financial Services Authority about the amount of money it should set aside to cover defaults in its bond portfolio. L&G said it was not involved in any exceptional talk with the regulators.

The euro fell a quarter percent to $1.2755.

U.S. crude oil rose half a percent to $37.68 a barrel.

Euro zone government bonds rose, helped by funds seeking less riskier investment and bids by investors betting on a euro zone interest rate cut next month.

Two-year euro zone government bond yields fell as low as 1.246 percent, their lowest since the euro's 1999 launch. The March bund futures rose 48 ticks.

In a further sign of risk aversion, the cost of protecting U.S., Belgian and Slovak government debt against default rose to record highs, according to monitor CMA DataVision.


G7 financial chiefs made no specific reference to the yen's strength or sterling's weakness -- two currencies which investors had speculated could be included in the statement.

The yen was down 0.1 percent at 91.79 per dollar. Sterling rose 0.3 percent to $1.4262.

The dollar .DXY hit a two-month high against a basket of major currencies, up 0.7 percent on the day.

There was nothing controversial in the G7 statement, so it is very much back to square one for the currency market now, Brown Brothers Harriman said in a note to clients.

The main themes still relate to de-leveraging and to trying to assess which country is proving more aggressive or efficient in trying to tackle the financial market crisis. Here, we believe that the greenback will remain a winner.