GLOBAL MARKETS-Recovery doubts drive down stocks, lift dollar

* Investors load up on Treasuries first day of new quarter

* Dollar up on safe-haven bid, EU's Almunia remarks

* MSCI off 2.13 pct over doubts of solid U.S. recovery (Updates with U.S. markets close, employment data on Friday)

By Jennifer Ablan

NEW YORK, Oct 1 (Reuters) - Investors scrambled for safety on Thursday, driving U.S. stocks to their biggest loss in three months and propelling safe-haven bids for government bonds and the dollar on fresh concerns about the strength of the U.S. economic recovery.

A disappointing reading on U.S. manufacturing activity and and an unexpected rise in new claims for jobless benefits by U.S. workers drove investor sentiment around the world, sending European shares to a three-week closing low just one day after recording the best quarterly gains in a decade.

The Dow Jones industrial average <.DJI> was down 203.00 points, or 2.09 percent, at 9,509.28, and the Standard & Poor's 500 Index <.SPX> was down 27.23 points, or 2.58 percent, at 1,029.85.

The biggest loser was the Nasdaq Composite Index <.IXIC> which was down 64.94 points, or 3.06 percent, at 2,057.48.

The MSCI world equity index <.MIWD00000PUS> slid 2.13 percent, kicking off October on a sour note after soaring 17 percent in the third quarter which ended Wednesday.

Money managers and hedge funds are bracing for more down days.

"At the risk of being the boy who cried wolf, I believe that market participants have a false sense of security in rising equity share prices," said Doug Kass, founder and president at hedge fund Seabreeze Partners Management in Palm Beach, Florida.

Kass said there continue to be "tentative signs" in housing, automobiles, manufacturing surveys and other economic indicators that September was weaker than generally expected. For story, see [ID:nN01395512].

U.S. Treasuries rallied, sending yields on the 30-year bond to five-month lows, as sinking stocks and the disappointing economic data stoked a bid for safety.

The U.S. Labor Department said initial claims for state unemployment benefits rose to 551,000 last week from 534,000 in the previous week, more than economists' expectations for 530,000. It was the first rise in three weeks.

Separately, the Institute for Supply Management said its index of national factory activity eased to 52.6 in September from 52.9 in August -- below expectations for a reading of 54.

"The labor markets remain the weak link in this recovery process," said Kevin Flanagan, fixed income strategist for Global Wealth Management at Morgan Stanley in Purchase, New York.

The Labor Department will release the September U.S. payrolls report on Friday, with expectations payrolls were down 180,000.

The U.S. data followed the release of disappointing numbers on euro zone unemployment and UK manufacturing activity.

The Reuters/Jefferies CRB commodities index <.CRB> was down 3.84 points, or 1.48 percent, at 255.55.

Oil prices, however, rose slightly, as concerns over the West's negotiations with Iran about the OPEC member's nuclear program outweighed the demand worries on the lackluster U.S. economic data.

U.S. crude oil futures settled at $70.82 a barrel, up 21 cents.

Investors' favorite safe havens, Treasuries and the greenback, benefited from the global move away from stocks.

The benchmark 10-year U.S. Treasury note was up 30/32, with the yield at 3.1936 percent, while the 2-year U.S. Treasury note was up 4/32, with the yield at 0.8772 percent.

At the longer end of the yield curve, the 30-year U.S. Treasury bond was up 51/32, with the yield at 3.9616 percent, settling at five-month lows.

DOLLAR GAINS OVER DOUBTS ON RECOVERY

The dollar rose against a basket of major trading-partner currencies, with the U.S. Dollar Index <.DXY> up 0.73 percent at 77.21 from a previous session close of 76.653.

The greenback got a whiff of the flight-to-quality bid on doubts over the potency of the U.S. economic recovery.

"The main driver is a slow increase in risk aversion at a time when ... data around the world are showing a slight slowdown in the pace of manufacturing" recovery, said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

Comments by a top European official about the euro's recent gains hurt the single currency.

Traders focused on remarks made by Joaquin Almunia, the European Union's economic and monetary affairs commissioner, who said euro strength would be discussed when Group of Seven officials meet in Istanbul at the weekend. [ID:nL1607718]

The euro was down 0.71 percent at $1.4531 from a previous session close of $1.4635. Against the Japanese yen, the dollar was down 0.04 percent at 89.71 from a previous session close of 89.750. (Additional reporting by Gertrude Chavez-Dreyfuss in New York and Natsuko Waki in London; Editing by Leslie Adler)