* MSCI world equity index down 3.8 pct at 229.15
* Panic selling hits Asian, European bourses and oil
* Dash for cash even hits government bonds; yen, gold rise
(Updates prices, adds LIBOR)
By Natsuko Waki
LONDON, Oct 10 (Reuters) - Europe and Asia saw panic selling of stocks on Friday, knocking the benchmark world equity index to a 5-year trough, while oil fell to a one-year low as fears grew policymakers are not making enough efforts to contain the financial crisis.
Government bonds in Japan and the euro zone -- usually safer assets which outperform in times of risk aversion -- fell as investors dashed to cash in any assets they have to gain access to capital.
Equity trading in Russia, Iceland, Romania, Ukraine and Indonesia has been halted while nearly half the stocks in Milan are suspended for excessive losses, just hours before finance chiefs from Group of Seven rich nations meet in Washington.
So far, measures from the United States, Britain and other countries to fight the worst financial crisis in 80 years -- even this week's coordinated interest rate cuts -- have failed to calm credit and money markets and quell investor fears.
"The stark reality is that markets have judged the coordinated interest rates cut not to have been enough, and we are now left wondering how best to get ourselves out of this downward spiral," said Chris Hossain, senior sales manager at ODL Securities.
"One gets the feeling that this market is now strictly confined to the brave." MSCI world equity index <.MIWD00000PUS> fell more than 4 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 weekly, monthly and yearly performance in 20 years.
RELENTLESS SELL-OFF
Japanese stocks <.N225> fell nearly 10 percent for their biggest one-day percentage loss since 1987. Yamato Life Insurance, an unlisted midsized insurer, became the first Japanese financial institution to collapse in this crisis.
In Japan, investors dumped even domestic government bonds -- considered safer than most other assets -- as fears of counterparty defaults froze the key repurchase market, prompting dealers to sell bonds to secure cash.
"This is panic... There's nothing left for us to trust," said Takashi Ushio, head of investment strategy at Marusan Securities. "Investors are scurrying to convert to cash. A lack of confidence is coupling with panic."
U.S. stock futures were down around 2 percent
Tensions persisted in the money market, where the cost of
borrowing dollars for three months rose to 4.81875 percent
In the European credit market, sentiment deteriorated
sharply with spreads measured by the Crossover index
"The market is catching up with the grim reality that this isn't going to be a mild downturn. The mass leverage that people have built up over the past decade or more is catching up, and it's going to be a long and painful process," said James Hamilton, bank analyst at Numis.
Emerging stocks <.MSCIEF> fell 3.8 percent to a fresh three-year low while emerging market spreads <11EMJ> widened 10 basis points to trade 556 basis points over U.S. Treasuries.
U.S. crude oil
The December bund future
The yen, which benefits from a surge in risk aversion, rose
0.4 percent against the dollar to 99.76 yen
The dollar <.DXY> rose 0.15 percent against a basket of major currencies. (Additional reporting by Steve Slater and Rebekah Curtis)