* MSCI world equity index down 0.85 percent at 212.56
* Rally after UK bank rescue package evaporates
* S&P ratings downgrade on Spain hits euro
By Natsuko Waki
LONDON, Jan 19 (Reuters) - World stocks fell on Monday as optimism after Britain's multi-billion rescue plan gave way to concerns about the banking sector after Royal Bank of Scotland reported the biggest ever loss in UK corporate history.
The euro tumbled after Standard & Poor's cut Spain's credit rating, following its downgrade of Greece last week. Oil fell 6 percent below $35 a barrel, hit by worries about weakening energy demand in a slowing economy.
Britain will allow banks to insure against steep losses and guarantee their debt to stop the credit crunch pushing the economy into a deep slump. The plan raises the government's stake in RBS, which said it lost over 20 billion pounds last year, sending shares down nearly 70 percent.
"Whilst today's measures will be widely welcomed, significant risks remain," said Keith Bowman, equity analyst at Hargreaves Lansdown.
"All in all, should these measures fail, a further ratcheting-up of bank sector nationalisation in order to force lending would appear to be the next step, a conclusion seen beyond all possibility just 12 months ago."
The FTSEurofirst 300 index of leading European shares fell 2 percent, reversing gains of more than 1 percent earlier. The MSCI world equity index fell 0.8 percent, after making its biggest weekly loss since late November last week.
Emerging stocks fell 0.6 percent. UK banking woes knocked sterling to a two-week low of $1.4452.
EURO AND DOWNGRADES
S&P cut Spain's long-term sovereign credit ratings to AA+ from AAA, after it downgraded Greece last week and gave recent warnings on Ireland and Portugal. Worries about European government debt burdens have been growing as countries fund packages to boost local economies.
"It's a theme in general ... and it will continue to run for a while. Looking at the fiscal balances in Europe, that's where the economic crisis is hurting at the moment - Ireland and Southern Europe," said Niels From, chief analyst at Nordea in Copenhagen.
The euro fell 1.4 percent to $1.3139. The dollar fell 0.7 percent to 90.31 yen while it rose 0.7 percent against a basket of major currencies.
The yield premium investors sought for holding the 10-year Spanish benchmark bond compared with the more liquid German government bond held at 114 basis points, having hit a record 122 bps earlier.
U.S. crude oil fell 6.2 percent to $34.25 a barrel, pressured by concerns about weakening oil demand, as well as signs of a resolution of a gas row between Russia and Ukraine and a ceasefire between Israel and Hamas in Gaza.
The March bund future fell 52 ticks. (Editing by Andy Bruce)