GLOBAL MARKETS-Banking woes overshadow U.S. bailout for BofA

* Short-lived rally for stocks upended by bank woes

* Dollar mixed, British pound hammered

* Oil down in volatile trade

By Daniel Bases

NEW YORK, Jan 16 (Reuters) - The government gave and the market took away on Friday, as a plunge in bank shares in the U.S. and Europe overwhelmed the positive sentiment created by the U.S. government's $20 billion capital infusion into Bank of America.

Washington's decision, which includes the sharing in losses on $118 billion worth of mortgages, was announced during Asian trading hours and sparked a rally for shares there that extended through much of the European session before running out of fuel.

Oil prices were pushed and pulled between forecasts of lower demand and the impact of cold weather in most of the United States. The downturn in stocks contributed to a cut in losses for safe-haven U.S. Treasuries as risk appetite ebbed.

Bank of America posted its first quarterly loss in 17 years on the heels of the government's midnight announcement of a fresh round of aid to help the largest U.S. bank absorb its Jan. 1 purchase of troubled brokerage Merrill Lynch & Co.

"Coming into 2009, we thought we had the big bailouts past us as far as the financials are concerned, and that we can take TARP money and pit it toward something else," said Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey.

"Now it's clear that there could be more big banks coming back to the well, asking the government for money. And when does this end and when do they say no? They just keep writing checks," he added.

Citigroup, the former No. 1 and now No. 3 in U.S. banking, reported a fourth quarter loss of $8.29 billion. Over the past 15 months Citigroup has amassed an astounding $92 billion in losses. The bank announced plans to split itself in two and shed troubled assets.

Citigroup shares lost 1.04 percent to $3.79.

Bank of America's stock fell 14.9 percent to $7.08. The share prices had risen initially on the news of the bailout funds but the size of their quarterly losses -- $15.31 billion for Merrill Lynch and $1.79 billion for Bank of America -- and the need for more funds unsettled investors.

Similar uneasiness hit UK banking shares just prior to the European close of stock trading, which is thought to have contributed to a drubbing for the British pound. Sterling dropped from a high of $1.4980 to $1.4660, roughly unchanged on the day .

In London, Barclays Plc shares fell 24.85 percent while Royal Bank of Scotland lost 13 percent. U.S. listed shares of Barclays were down 26.19 percent.

Several equity traders contacted by Reuters could not identify a specific reason for the late slide in Barclays or any of the stocks, but cited several rumors including worries about the impact of a UK rescue plan being discussed, executive departures, writedowns and capital.

Also, a British ban on short selling of financial stocks expired on Friday.

"The shorting ban has been lifted and I guess the short guys have been sharpening their tools and looking to see who they'll have to pop at next," said Numis Securities analyst James Hamilton.

In midday New York trade, the Dow Jones industrial average <.DJI> was down 53.05 points, or 0.65 percent, at 8,159.44. The Dow had been up as much as 1 percent in early trade.

The Standard & Poor's 500 Index <.SPX> dropped 6.53 points, or 0.77 percent, to 837.21. The Nasdaq Composite Index <.IXIC> lost 9.86 points, or 0.65 percent, to 1,501.98.

European share gains were cut by the close, though major indexes ended the week on a high note.

The FTSEurofirst 300 <.FTEU3> index of top European shares ended up 1 percent at 803.90 points. However for the week the index fell 7.3 percent.

Commodity related shares were among the biggest gainers, with mining and oil shares such as Xstrata adding 6 percent, Total rising 1.1 percent and Rio Tinto gaining 7.6 percent.

Japan's benchmark Nikkei 225 index <.N225> rose 2.6 percent in the early hours of the rescue plan. The retreat in the yen also helped lift shares of exporters such as Honda Motor Co <7267.T> which gained 7.95 percent. A weaker yen makes Japanese exports more competitive globally.

The dollar, while down against a basket of currencies, managed to gain on the yen, rising 0.69 percent to 90.40 from a previous session close of 89.780 .

The euro however rose 0.72 percent to $1.3248 from a previous session close of 1.3153 .

The benchmark 10-year U.S. Treasury note was down 35/32, with the yield at 2.3171 percent.

Investors sold longer-dated euro zone government bonds a day after driving the benchmark 10-year yield to an historic low. March German bund futures fell 52 ticks on the day at 125.65, and well off the historic high of 126.53 reached on Thursday.

In energy and commodities prices, U.S. light sweet crude oil fell 2.09 percent, to $34.66 per barrel, and spot gold prices rose 2.75 percent, to $837.80 an ounce. (Additional reporting by Reuters bureaus around the world, Editing by Chizu Nomiyama)