GLOBAL MARKETS-Panic sweeps US stocks, oil off on recession fear

* U.S. stocks plummet to more than five-year lows

* Yen falls vs euro, U.S. dollar as risk aversion eases

* Oil falls to below $85 barrel on energy demand worries

* Gold falls as investors take profits after 9-day rise (Adds close of U.S. markets)

By Herbert Lash

NEW YORK, Oct 9 (Reuters) - A wave of panic selling swept U.S. stocks on Thursday, driving the blue-chip Dow index down more than 7 percent, and oil prices dived, as widening fears of a global recession were unchecked by moves by authorities worldwide to thaw frozen credit markets.

Oil fell below $85 for the first time in almost 12 months on fears over world demand for energy. As the economic picture darkened traders ignored calls by some OPEC members to cut output to prop up prices.

Even gold, a traditional safe-haven, fell as investors opted for cash as global stocks slid.

Energy shares on both sides of the Atlantic fell with crude prices. Financial shares were also top losers in U.S. and European markets as measures to contain the credit crisis failed to instill confidence.

Investors were shaken when overnight interbank borrowing costs fell in the wake of deep rate cuts by central banks on Wednesday, but longer-term lending rates remained high.

The high rates cast doubts that money would flow into other parts of the money markets, such as commercial paper, and free up the clogged markets to all businesses to keep humming.

"The market is in show-me mode. There's a crisis of confidence," said Bruce Zaro, chief technical strategist at Delta Global Advisors Inc in Plymouth, Massachusetts.

An avalanche of selling in late U.S. trade drove the Dow below 8,600 for the first time since May 2003. The Nasdaq and the S&P 500 each also fell to levels not seen in more than five years.

The Dow Jones industrial average <.DJI> closed down 678.91 points, or 7.33 percent, at 8,579.19. The Standard & Poor's 500 Index <.SPX> plunged 75.02 points, or 7.62 percent, at 909.92. The Nasdaq Composite Index <.IXIC> tumbled 95.21 points, or 5.47 percent, at 1,645.12.

Over past seven days, the Dow shed almost 21 percent and the S&P 500 nearly 22 percent, their worst seven days since October 1987 in the wake of Black Monday. The Dow is down nearly 40 percent from a record high above 14,000 hit exactly one year ago.

Shares of General Motors tumbled 31.1 percent to their lowest level since 1950 as concerns mounted that an industry decline that started in the United States was spreading and as a leading forecaster warned global auto demand could "collapse" in 2009.

Wachovia Corp shares slumped 28.85 percent on concerns that talks to divvy up the troubled bank had hit a snag, leading a broader drop in U.S. regional banks.

Shares in Morgan Stanley plunged 25.89 percent on ongoing concern about the status of a planned $9 billion investment by Japan's top bank, Mitsubishi UFJ Financial Group <8306.T>, in the U.S. investment bank.

Morgan Stanley shot down speculation about the deal. Some traders blamed the steep drop on short-sellers after the end of a temporary ban on the downside bets in financial stocks.

The S&P financial index slumped 11.7 percent, and the S&P energy index slid 11.4 percent.

European stocks fell, extending a slide to four days, after trading higher earlier in the session. The FTSEurofirst 300 <.FTEU3> index of top European shares fell 2.05 percent to 921.46.

The biggest drag on the European index were utilities <.SX6P>, which fell on expectations that declining oil prices, a barometer for commodity prices, will lead to a cut in electricity prices.

GDF Suez lost 13.1 percent, EDF slipped 10.5 percent and E.ON dropped 10.7 percent.

Oil and banking shares also were big drags on the index, with Barclays falling 13.2 percent. Royal Dutch Shell fell 3.2 percent and BP shed 1.8 percent.

Demand for government bonds, gold and low-yielding currencies -- all recent beneficiaries of a scramble for relative safety as global equity markets -- tanked.

Analysts said the dollar would stay supported as long as credit markets remain frozen.

"(There has) been a scarcity of dollars and investors looking for dollars have gotten some through the forex market," said Robert Sinche head of strategy for currencies at the Bank of America in New York.

The dollar rose strongly at day's end on a safe-haven bid, with the U.S. Dollar Index <.DXY>, a basket of major currencies, up 0.56 percent at 81.373.

Against the yen, the dollar rose 0.26 percent at 99.51, while the euro fell 0.18 percent at $1.3605.

Euro zone government bonds fell sharply, suggesting that some risk appetite emerged after the coordinated rate cuts.

Although debt yields were higher across all maturities, shorter-dated paper outperformed longer-dated peers, underpinned by expectations for more rate cuts and driving the 2/10-year yield curve to its steepest level since February.

U.S. Treasuries fell for a third straight day as debt supply issues weighed on investor sentiment.

The benchmark 10-year U.S. Treasury note fell 33/32 in price to yield 3.78 percent. After being down most of the day, the 2-year U.S. Treasury note pared losses to trade little changed in price to yield at 1.55 percent. Gold slipped as investors cashed in gains that took the precious metal to a nine-day high in the previous session.

December gold futures settled down $20 at $886.50 an ounce in New York.

U.S. crude settled down $2.36 at $86.59 a barrel before dropping to $84.63 -- its lowest level since October 2007 -- in post settlement trade when the Dow Jones industrial average slipped below 9,000.

London Brent crude fell $1.70 to settle at $82.66 a barrel.

The Organization of Petroleum Exporting Countries said it will hold an emergency meeting on Nov. 18 in Vienna to discuss the impact of the financial crisis on oil markets.

"The Organization is concerned about the deteriorating economic conditions with contagion risks," OPEC said in a statement announcing the meeting.

"The continuing turmoil in the financial markets has spread to many regions and created even more uncertainties for the world economy."

Stocks clung to small gains overnight in Asia. MSCI's index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> rose 2.05 percent after a 9 percent tumble on Wednesday, its biggest single-day fall in at least two decades. (Reporting by Ellis Mnyandu, Chris Reese and Wanfeng Zhou in New York and Jamie McGeever, Tamawa Kadoya, Jane Merriman and Jan Harvey in London; Writing by Herbert Lash; Editing by Leslie Adler)