* Panic selling hits U.S., European, Asia bourses
* MSCI world equity index sees five-year low
* Dash for cash even hits government bonds
* Dollar rises on scramble for hard currency
(Recasts lead, updates prices)
By Pedro Nicolaci da Costa
NEW YORK, Oct 10 (Reuters) - Global stocks dove head first to five-year lows on Friday at the end of a brutal week as even the traditional safe-havens of gold and government bonds suffered as fear-stricken investors sought refuge in cash.
U.S. stock markets recouped a good portion of their losses late in the day, as investors looked to an imminent meeting of Group of Seven finance ministers for a policy response to the deepening global credit crisis.
The dollar rose to a 15-month high against a basket of major currencies as investors scrambled for cash preferably in the world's reserve currency. The euro capped its worst two-week period against the collar since the introduction of the single currency in 1999.
Oil fell below $80 for the first time in a year and gold slid.
"It's total panic. People are so scared that they are looking to liquidate everything that has cash value and to stay away from everything," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.
In U.S. equities, the Dow Jones slid as much as 8 percent to break below 8,000 for the first time since April 1, 2003, before paring losses to close down 1.5 percent. A late pop in technology shares helped the Nasdaq eke out its first gain of the month on Friday.
The broad S&P index had its worst week ever, while the Dow was down 18 percent for the week.
"The new lows we've seen in stock markets this week are the result of panic selling," said Joost van Leenders, asset allocation specialist at Fortis Investments.
The Dow Jones industrial average <.DJI> finished the day down 128.00 points, or 1.49 percent, at 8,451.19. The Standard & Poor's 500 Index <.SPX> was down 10.70 points, or 1.18 percent, at 899.22. The Nasdaq Composite Index <.IXIC> managed to squeak 4.39 points higher to 1,649.51.
Morgan Stanley
European shares closed out their worst week ever, with the pan-European FTSEuroFirst 300 index <.FTEU3> shedding 22 percent for the week after closing down 7.6 percent. The FTSEurofirst 300 closed at 851.23 points, its lowest close since July 2, 2003.
The DJ Stoxx European bank index <.SX7P> fell 10.6 percent,
with Royal Bank of Scotland
The MSCI world equity index <.MSCIEF> fell more than 4.0 percent at one point to a five-year low, losing a fifth of its value this month alone. The index has lost 43 percent since January, on track for its worst yearly performance in 20 years.
In U.S. government bonds, only short-term Treasury bills, which are considered pretty much a cash equivalent, were able to catch a bid.
The benchmark 10-year U.S. Treasury note
"We are not used to seeing stocks implode and Treasuries sell off," said Josh Stiles, senior bond strategist at IDEAglobal. "People are saying they don't even want to be in Treasuries now, they need the cash."
The U.S. dollar rose as investors moved out of riskier markets. Earlier the flight-to-safety sent the yen to a more than six-month high against the U.S. dollar and a three-year peak versus the euro. The Japanese currency also rose sharply against higher-yielding units such as the Australian and New Zealand dollars, as carry trades were unwound.
"As long as markets remain risk averse to this degree, it is difficult to see the U.S. dollar making a material reversal despite many of the issues currently gripping global markets being home grown," said Dustin Reid, senior currency strategist at RBS Global Banking & Markets in Chicago.
Tensions persisted in the money market, where the cost of borrowing dollars for three months rose to 4.81875 percent at the fixing in London.
In foreign exchange, increased risk aversion left the yen as the currency of choice, with the euro earlier falling to a three-year low of 132.80 yen and the dollar hitting a 6-1/2-month low of 97.92 yen.
In New York, the Intercontinental Exchange's U.S. dollar index <.DXY> ,which tracks the value of the greenback against a basket of six currencies, was up 1.22 percent at 82.422, after rising as high as 82.223, the strongest level since June 2007.
The euro fell nearly 1.0 percent against the dollar at $1.3468.
Fears about Britain's vulnerability to the financial crisis sent the pound tumbling to a five-year low of $1.6802.
U.S. crude oil fell slumped 8.9 percent to settle at $77.70.
Gold prices slid as the equities rout sparked a sell-off in commodities. Spot gold was down 1.8 percent at $870 an ounce on the rally in the dollar and profit-taking.
G7 TO THE RESCUE?
Investors are looking to the weekend's meeting of leaders from the Group of Seven major industrial nations. However, hopes for a comprehensive deal to help to solve the crisis were fading fast.
"It is not clear we will see much from the G7 meeting and this will probably keep risk appetite under pressure," said Rob Minikin, senior currency strategist at Standard Chartered.
Coordinated interest rate cuts by the Federal Reserve and other major central banks this week failed to relieve investor fears that the freeze in credit markets will damage banks further and provoke a deep recession around the world.
"Essentially we're flying blind. No-one has a clue what's going on," DZ Bank currency strategist Sonja Marten said. "The uncertainty is too great and volatility is incredible. It's a question of market confidence and somehow we're going to have to get it back."
Earlier Friday Europe and Asia saw panic selling of stocks while oil prices fell to a one-year low as fears grew policymakers are not making enough efforts to contain the financial crisis.
Equity trading in Russia, Iceland, Romania, Ukraine and Indonesia was halted .Emerging stocks fell nearly 5 percent to a fresh three-year low. (Additional reporting by Ellis Mnyandu, Kristina Cooke and Chris Reese in New York and Steve Slater, Rebekah Curtis and Jessica Mortimer in London; Editing by Leslie Adler)