GLOBAL MARKETS-Stocks stumble as doubts rise on rate cut efforts

* European, U.S. stocks falter as doubts on rate cut rise

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

* Oil slips to around $87 barrel on energy demand worries

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

By Herbert Lash

NEW YORK, Oct 9 (Reuters) - An equities rally stumbled on Thursday as investors cast doubt on a coordinated global effort to stem a worsening worldwide credit crisis by cutting interest rates, and even safe-haven assets fell as uncertainty ruled the day.

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

Expectations that energy demand will fall sharply if the credit crisis pushes the global economy into a prolonged recession pushed crude oil lower to around $87 a barrel.

The yen fell broadly and higher-yielding currencies bounced as extreme risk aversion receded in jittery financial markets.

Key central banks around the world cut rates on Wednesday in a coordinated response to halt the worst financial crisis to sweep the world in almost 80 years.

Rallies in both European and U.S. stocks proved to be short-lived, with a downturn on Wall Street quickly echoed in Europe. Financial and energy shares sold off on both sides of the Atlantic.

U.S. stocks initially rose as investors snapped up beaten-down shares and took heart from strong earnings from technology bellwether IBM after a six-day slide on Wall Street that has pushed the Dow by more than a third a record peak hit exactly one year ago. By mid-morning, however, the bargain-hunting bounce fizzled and the Dow and S&P 500 were lower, although the Nasdaq was slightly higher.

"There's still a significant amount of nervousness that the credit crisis has not seen its end and there are still more problems that lie ahead," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"People are scared about what they don't know and the fear of the unknown is what's causing people to sell stocks and ask questions later."

Before 1 p.m., the Dow Jones industrial average <.DJI> was down 120.18 points, or 1.30 percent, at 9,137.92. The Standard & Poor's 500 Index <.SPX> was down 14.71 points, or 1.49 percent, at 970.23. The Nasdaq Composite Index <.IXIC> was down 4.36 points, or 0.25 percent, at 1,735.97.

Shares in Morgan Stanley plunged as much as 25 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.

Energy shares fell on concerns over the economy's effect on demand, with Exxon Mobil and Chevron both down around 5 percent.

"The market is definitely trading on rumors, not news," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.

The tech-rich Nasdaq rose after International Business Machines Corp posted solid profit, lifting its shares about 1.5 percent. Microsoft led the Nasdaq higher with a 2.5 percent gain.

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 expecations 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.

The cost of interbank borrowing overnight cash fell in response to the move by financial authorities to restore calm to jittery markets. The cost of dollar, euro and sterling funds for the overnight rate all fell substantially, although by less than one-half percentage point.

The rate cuts were aimed at unclogging the credit markets and to keep business activity humming.

But the cost of borrowing dollars for any period beyond the overnight rate rocketed. Three-month dollar Libor hit its highest rate this year as banks scrambled for greenbacks to cover U.S. currency positions and to fund dollar assets.

"We're not seeing any relief in term Libor fixings which tells us that the rate cut has exclusively impacted on the overnight market but it hasn't touched the Libor market at all," said BNP Paribas rate strategist Alessandro Tentori in London. "And that's not a very good sign," he said.

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

The December Bund future traded down 81 ticks at 116.04, but up from a near-one week low of 115.46 earlier in the session.

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. The 2-year U.S. Treasury note slipped 8/32 in price to yield 1.69 percent.

The low-yielding yen fell from a three-year high against the euro and a six-month peak versus the dollar that it hit the previous day, although it later pared some losses.

The dollar rose against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.38 percent at 81.222. Against the yen, the dollar was up 1.10 percent at 100.34.

The euro gained 0.11 percent at $1.3644.

Gold slipped as investors cashed in gains that took the precious metal to a nine-day high in the previous session.

Spot gold prices fell $20.05 to $886.45 an ounce.

U.S. light crude for November delivery fell $1.70 at $87.25 a barrel. London Brent crude fell $1.37 at $82.99 a barrel.

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)