GLOBAL MARKETS-Fed fallout weighs on dollar; oil hits 4-yr low

* MSCI world equity index up 0.4 percent at 231.13

* Dollar hits 2-1/2 mth low vs euro, sterling at record lows

* Oil falls below $40 before recovering

By Natsuko Waki

LONDON, Dec 18 (Reuters) - The dollar hit a 2-1/2 month low against the euro and held close to a 13-year low versus the yen on Thursday, pressured by the Federal Reserve's aggressive rate cut this week, while European stocks ticked higher.

Oil hit a four-year low below $40 a barrel, having fallen eight percent on Wednesday, as further evidence of slowing demand outweighed OPEC's biggest ever production cut.

The fallout from Tuesday's dramatic move by the U.S. central bank to cut interest rates to near zero and the promise for more quantitative easing action intensified, with investors betting that the Bank of England would also deliver deep rate cuts, which knocked sterling.

The euro has gained nearly 8 percent against the dollar this week, on track for its biggest weekly gain ever since its introduction in 1999.

"The dollar ... is vulnerable because of what they're doing in terms of policy and the potential for quantitative easing in the U.S.," said Robert Minikin, senior currency strategist at Standard Chartered in London.

The euro rose to a high of $1.4493 , before trimming gains after a weaker-than-expected reading in the closely-watched German IFO business climate index survey.

The dollar stood at 87.85 yen , after falling as low as 87.11 yen on Wednesday, a day after U.S. target interest rates fell below those of Japan for the first time in more than 10 years.

MSCI world equity index <.MIWD00000PUS> rose 0.3 percent, helped by Asia's 1.6 percent gains. The FTSEurofirst 300 index of leading European shares were up 0.2 percent <.FTEU3> in volatile trade. Emerging stocks <.MSCIEF> rose 1.1 percent.

FX WARNING

Sterling fell as low as 94.01 pence per euro , its lowest on record, and also hit a record trough of 77.4 on a trade-weighted basis <=GBP>.

Bank of England Deputy Governor Charles Bean said zero interest rates in Britain are a possibility and further capital injections may be required in the banking sector. The benchmark UK rates currently stand at 2 percent.

The Bank of Japan is expected to cut interest rates toward 0.1-0.15 percent on Friday.

An export-damaging strengthening of the yen prompted an intervention warning from Japanese authorities. A senior Ministry of Finance official said the ministry would take appropriate action as needed in the currency market, while Japan's top government spokesman said the government would take proper steps to cope with the yen's rise.

The dollar <.DXY> was steady against a basket of major currencies.

U.S. crude oil traded at $40.38 a barrel, having fallen as low as $39.19 earlier. The March bund futures were down 7 ticks.

(Additional reporting by Naomi Tajitsu; Editing by Toby Chopra)