* MSCI world equity index falls 0.99 percent to 226.14
* U.S. dollar eyes largest weekly decline since 1985
* BOJ cuts rates by 20 bps to 0.1 percent, JGB yields fall
By Carolyn Cohn
LONDON, Dec 19 (Reuters) - The dollar looked set on Friday for its biggest weekly decline since 1985 and world stocks fell as weak oil prices and concerns about the U.S. economy worried investors in the last full trading week of 2008.
Japanese government bond yields fell to 3-1/2 year lows after the Bank of Japan cut its key policy rate by 20 basis points to 0.10 percent, the lowest rate since 2006.
Japan joined the global trend for lower interest rates after the United States took rates close to zero earlier this week, with the auto industry the latest focus for concern over the U.S. economy.
General Motors Corp and Chrysler LLC approached a deal on Thursday to secure emergency loans as part of a U.S. government aid package, sources familiar with the talks told Reuters.
"The automakers' issue is a problem for the entire U.S. economy ... and the fall in oil prices is part of a global economic story because of demand issues, and that's dragging on the dollar," said James Hughes, markets analyst at CMC Markets.
"The automakers and oil prices, they're not just dominating the currency markets, they're also dominating the equity markets as well."
The increasingly low-yielding dollar has fallen 4.6 percent on a trade-weighted basis this week, heading for its biggest weekly fall since September 1985, as traders start to close positions for the year ahead of the Christmas break.
The dollar rose 20 percent between July and November, boosted by worries about recession in the euro zone and by a flight to quality during the global financial crisis.
The dollar was steady against the euro at $1.4243 but fell 1 percent against the yen to 88.67 after hitting 13-year lows near 87 earlier this week.
Sterling, which is also suffering from increasingly low yields, hit a record low on a trade-weighted basis and hovered above Thursday's record low to the euro of 95.56 pence.
The MSCI world equity index fell 1.03 percent to 226.04 and the FTSEurofirst 300 index of leading European shares fell 1.05 percent, tracking U.S. and Asian shares, with sinking oil and metal prices hitting energy and mining stocks.
U.S. light crude oil for January delivery, which expires later on Friday, rose 28 cents to $36.50 a barrel after hitting 4-1/2 year lows on Thursday, with a record supply cut by OPEC viewed as a sign of worsening demand.
Friday is a quadruple witching day, on which stock index futures, stock index options, stock options and individual stock futures all expire.
This is likely to lead to "strange movements in equity markets...and flows that explode", said analysts at Calyon in a client note, adding that:
"It is Friday, six days before Christmas in the middle of a credit crunch and this will only amplify the movements."
Ten-year Japanese government bond yields fell to 1.21 percent, the lowest since July 2005, after the Japanese rate cut.
Euro zone government bond yields were flat at 1.878 percent.
(Additional reporting by Naomi Tajitsu)