* Investor fear rise on weak economic recovery; rating cut
* Bank shares fall on worries Dubai debt problem
* Dollar rises on flight-to-safety trade
* Gold, oil weaken on dollar's strength
By Manuela Badawy
NEW YORK, Dec 8 (Reuters) - Risk aversion swelled on Tuesday driving global stocks down as worries over Dubai's debt problems hit bank shares and the dollar rose against the euro after Fitch Ratings agency downgraded Greece's credit.
Investors retreated from riskier emerging markets and higher yielding currencies, as officials dithered over a rescue for debt-laden state conglomerate Dubai World [DBWLD.UL] and ratings agency Moody's downgraded government-related debt.
Moody's cut the ratings of six Dubai-linked issuers after
concluding that no "meaningful" government support would be
provided for top firms like DP World
"Investors have been reminded there are many issues out there - the Dubai World and the Greek downgrades - it suggests there are still many potential nasties out there," said Peter Dixon, economist at Commerzbank.
The Dow Jones industrial average <.DJI> closed down 1.00 percent, at 10,285.97. The Standard & Poor's 500 Index <.SPX> fell 1.03 percent, at 1,091.94, and the Nasdaq Composite Index <.IXIC> weakened 0.76 percent, at 2,172.99.
Investors' fears rose sharply amid concerns about obstacles still facing the global economy. The Volatility Index <.VIX>, Wall Street's main barometer of investor fear, rose 7.19 percent. A rise in the so-called VIX index indicates worsened investor sentiment.
The dollar rose against the euro for the third straight session and the yen also rose broadly as investors reduced yen-funded "carry trades," while Moody's Investors Service stoked unease when it said fiscal crises in a number of top-rated countries could last for "several years."
Carry trades involve borrowing the U.S. currency at low rates to finance purchases of high-yielding assets.
"Prospects for sovereign downgrades are really creating a bearish backlash in the market right now," said Andrew Wilkinson, senior analyst at Interactive Brokers' Group in Greenwich, Connecticut.
The dollar rose against a basket of currencies, with the
U.S. Dollar Index <.DXY> up 0.6 percent at 76.218. The euro
European share prices fell, led by banks, as worries continued to percolate over their exposure to the debt woes for Dubai World and Greece's credit rating downgrade by Fitch Ratings.
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares closed down 1.6 percent at 1,004.41 points and hit a one-week low of 999.71. The index is up 56 percent since reaching a record low in early March and is up about 21 percent for the year.
The Fitch downgrade also undermined risk taking, fueling the rise in the U.S. dollar for safety's sake which had the effect of putting downward pressure on commodity prices.
Spot gold
The price for a barrel of crude oil fell $1.25 or 1.69 percent, to $72.68 on the back on the rise of the dollar and worries about the strength of the economic recovery.
MSCI emerging market stock index <.MSCIEF> slid 1.14 percent. Dubai's share index <.DFMGI> was among the biggest losers, falling 6.1 percent to a 21-week closing low.
Meanwhile, U.S. Treasury prices rose heartened by the realization that despite last week's improved jobs report for November, the Federal Reserve would not be in a hurry to raise interest rates.
The benchmark 10-year U.S. Treasury note