* European stocks fall; MSCI world equity index up 1 percent
* Dollar, government bond yields fall; sterling tumbles
* Oil falls ahead of OPEC
By Natsuko Waki
LONDON, Dec 17 (Reuters) - The dollar hit a 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen on Wednesday after the Federal Reserve slashed interest rates to near zero and pledged more action.
European stocks fell while U.S. stock futures were pointing to a weaker open on Wall Street. Sterling tumbled on weak UK data and expectations for deep interest rate cuts in Britain. Government debt prices shot up as investors expect a prolonged period of low interest rates, pushing the benchmark 10-year U.S. Treasury yield to fresh five-decade lows.
In a surprisingly aggressive move, the Fed cut its target for the benchmark rate to zero to 0.25 percent from 1 percent on Tuesday, virtually exhausting traditional measures to battle the year-long recession. It also promised to take more action by extending its quantitative easing measures.
"The Fed had an explicit commitment that they will leave interest rates very low for an extended period and that's quite negative for the dollar because of relative interest rates," said Adarsh Sinha, currency strategist at Barclays Capital.
The MSCI world equity index rose 1 percent, trimming gains after hitting its highest level since Nov. 11. The FTSEurofirst 300 index of leading European shares fell 0.6 percent. Emerging stocks rose 2.3 percent.
U.S. stock futures were down around 1.7 percent.
"Traders are now concerned that the Fed may have played their hand, and they now have little left in their arsenal should the move fail to revive the economy," said Richard Curr, Head of Dealing at Blue Index.
The U.S. currency fell to a 2-1/2 month low of $1.4191 per euro. The dollar was down 0.3 percent at 88.65 yen, moving closer to a recent 13-year low.
The dollar was up 0.17 percent against a basket of major currencies.
"The move will weaken the dollar further in the short term, particularly as the European Central Bank is signalling quite clearly that it might pause in January, reluctant to accept the need to move rates below 2.0 percent," said Marco Annunziata, chief economist at UniCredit.
Sterling hit record lows of 92.06 pence per euro -- extending its losses to more than 10 percent this month -- as expectations of further sharp UK rate cuts intensified following the Fed's action.
The pound was also knocked by weak British labour data and the Bank of England minutes showing policymakers had discussed an even bigger rate cut than a full point delivered earlier this month.
Interest rate futures are showing the Bank of Japan could cut the cost of borrowing to almost zero from 0.3 percent later this week and possibly follow the U.S. into quantitative easing, reviving a scheme it put in place five years ago.
U.S. crude oil erased early gains to trade 0.5 percent lower on the day at $43.35 a barrel. Earlier, the U.S. rate cut, a weaker dollar and expectations that OPEC would cut supplies at a meeting this week supported prices.
The 10-year U.S. Treasury yield fell to 2.20 percent, its lowest since at least 1951. March Bund futures rose 130 ticks. (Additional reporting by Veronica Brown and Jon Hopkins; Editing by Andy Bruce)