* MSCI world equity index down 0.6 percent at 240.91
* Sterling tumbles after S&P cuts UK ratings outlook
* Stocks slip, dollar hits lowest in almost 5 mths after Fed
By Natsuko Waki
LONDON, May 21 (Reuters) - Sterling tumbled from an earlier six-month peak and London stocks fell on Thursday after Standard & Poor's revised down its UK ratings outlook, while world stocks slipped after the Federal Reserve cut the U.S. economic outlook.
Britain, whose economy is in recession after the credit crisis hit its financial sector, has been boosting government borrowing to finance its massive fiscal easing programme. Data released just after ratings agency S&P's move showed domestic public borrowing hit a record high for the month of April.
The S&P lowered its outlook on Britain to negative from stable, because the UK's government debt burden may approach 100 percent of gross domestic product, although it affirmed the current triple-A ratings.
"This is a reality check for the UK government. They are not the U.S," said Kenneth Broux, economist at Lloyds TSB Corporate Markets.
"(The debt to GDP ratio) is set to rise sharply. Whether we get to 100 percent depends on the bank liabilities. But obviously S&P think the recession means more red ink and the latest borrowing estimates are unsustainable.
Sterling fell to 88.47 pence per euro after hitting its highest level against the euro in 3-1/2 months of 87.23 per euro.
Against the dollar, it was trading at $1.5609, falling sharply from an earlier six-month peak above $1.58. The June gilt future also tumbled, down 50 ticks at 119.46.
The cost of protecting UK government debt against default rose 2.3 basis points to 75.8 bps after the S&P move, according to CMA DataVision.
EQUITY SETBACK
World stocks slipped from this week's six-month peak and the dollar fell to its lowest in almost five months after the Federal Reserve lowered its forecast of U.S. economic growth for the next three years.
Minutes from its April meeting showed the Fed projected the world's biggest economy to contract by up to 2 percent this year with the unemployment rate rising to as high as 9.6 percent.
They also showed that Fed policymakers had considered buying more securities to spur recovery -- a move which would inject more dollars into the market.
Wednesday's disappointing 2009 outlook from Hewlett-Packard , the world's biggest PC maker, also fanned concerns about corporate profits in a slowing economy.
"There are concerns finally coming through about where the underlying growth is going to come from," said Justin Urquhart Stewart, investment director at Seven Investment Management.
"We need a growing level of demand. There's a certain amount of restocking happening, and unfortunately the market has been taking that as a sign of a recovery, which it is not." MSCI world equity index fell 0.6 percent after surging to levels last seen in early November on Wednesday.
The FTSEurofirst 300 index fell 1.7 percent while emerging stocks fell half a percent.
The setback comes after an almost uninterrupted rally from mid-March pushed the benchmark MSCI index up 42 percent.
U.S. crude oil -- whose prices are closely correlated with growth expectations -- fell 2.2 percent to $60.65 a barrel after hitting a six-month peak above $62 on Wednesday.
Despite the fall in risky assets, there have been signs that the worst may be over for the global economy.
The euro zone's services and manufacturing sectors contracted less than expected in May as firms saw the pace of decline in new orders ease. Markit's euro zone flash services purchasing managers' index rose to 44.7 in May from 43.8 last month, beating the consensus estimate of 44.5.
In a further sign of easing tensions in money markets, short-term dollar funding costs dropped further to fresh lows in Asia. In Singapore, 3-month dollar costs fell 4 basis points from Wednesday to 0.70917 percent, nearly half the levels in March.
On Wednesday, the Volatility Index -- Wall Street's fear gauge -- fell as low as 26.57 at one point, hitting its lowest level since Sept. 15, when Lehman Brothers filed for bankruptcy.
The June bund futures was steady on the day.
The dollar was down 0.1 percent against a basket of major currencies, having hit its lowest level since early January earlier. (Additional reporting by Sitaraman Shankar and Atul Prakash; Editing by Victoria Main)