* Euro falters after Moody's cuts Ireland credit rating
* U.S. Treasuries find interest as euro debt tumbles
* Wall Street struggles in late morning (Rewrites throughout, updates with opening of U.S. markets, changes byline, dateline from previous LONDON)
By Alina Selyukh
NEW YORK, Dec 17 (Reuters) - The euro fell against the dollar and world stocks dropped on Friday, weighed by renewed concerns over euro zone debt after a multi-notch downgrade of Ireland's credit rating.
Moody's slashed Ireland's credit rating by five notches, and warned that further downgrades could follow if Ireland didn't stabilize its debt situation. [ID:nLDE6BG0EG]
The move followed Fitch's downgrade last week, cutting Ireland's credit level by three notches. Earlier this week, Moody's placed Spain and Greece on a review for possible downgrades.
World markets gained little comfort after leaders at a European Union summit agreed to create a permanent financial safety net from 2013, though the EU provided no new measures to deal with the immediate crisis.
"Wall Street has reacted with trepidation to news that Moody's Investors Service cut Ireland's credit rating with a negative outlook," said Joseph Hargett, analyst at Schaeffer's Investment Research in Cincinnati, Ohio. "What's more, many traders are disappointed with the European Union's response to euro-zone debt issues following a two-day summit."
In New York trading, the euro extended losses against the dollar to hit a two-week low after a drop below $1.32 triggered automatic sell orders.
The euro slid as low as $1.3138 on trading platform EBS
European stock markets followed, with the FTSEurofirst 300 index of leading European shares <.FTEU3> down 5.27 points, or 0.47 percent, to 1126.03.
MSCI's all-country world stock index <.MIWD00000PUS> dipped 0.2 percent. The Thomson Reuters global stock index <.TRXFLDGLPU> fell 0.3 percent.
U.S. equity indexes struggling in late-morning trading.
The Dow Jones industrial average <.DJI> was down 24.79 points, or 0.22 percent, at 11,474.46. The Standard & Poor's 500 Index <.SPX> was down 0.64 points, or 0.05 percent, at 1,242.23. The Nasdaq Composite Index <.IXIC> was up 7.33 points, or 0.28 percent, at 2,644.64.
CONTAGION RISK LINGERS
Better-than-expected data on German business morale from think tank Ifo temporarily bolstered the euro in late European trade and marginally lifted gold and oil prices.
The two commodities flattened out since then, with U.S.
crude oil
In currencies, the dollar <.DXY> strengthened against a
basket of major trading-partner currencies, gaining 0.5 percent
to 80.54. Versus the yen, the dollar
Against the backdrop of the Ireland rating cut, investors
edged back into U.S. Treasuries. The benchmark 10-year U.S.
Treasury note
Over the last two weeks, Treasuries have been underselling on concerns of ballooning deficits, stemming from the extension of the Bush-tax cut plan. Late Thursday, the U.S. House of Representatives passed the deal between U.S. President Barack Obama and Republican leaders to extend expiring tax cuts. The measure now goes to Obama to sign into law.
Even so, Treasuries attracted interest in the wake of renewed euro zone debt concerns. "There is a risk that the sovereign crisis will spread across the Atlantic to the U.S. ... There's already evidence that it's turning to disorderly unwinding," said David Woo, head of global rates and currencies at Bank of America-Merrill Lynch.
"There are clearly very uncomfortable positions in the market that will be unwound, especially if data holds up."
High up on investors' radar is Ireland, whose debt levels have quadrupled since late 2007 on the back of a banking sector meltdown.
The premium that investors demand to hold 10-year Irish
government bonds
Benchmark 10-year Bund yields fell 2 bps to 3.029 percent as investors took refuge in safer German government debt.
The cost of insuring sovereign bonds issued by euro zone peripheral countries rose, with the five-year credit default swaps on Ireland widening 15 bps to 581 bps and Portuguese CDS moving out by 13 bps to 470 bps. (Additional reporting by Emelia Sithole-Matarise, Dominic Lau, Emily Flitter and Natsuko Waki in London, and Angela Moon in New York; editing by Jeffrey Benkoe)