GLOBAL MARKETS-World stocks, oil tumble on recovery doubts

* MSCI world equity index down 1.9 pct at 265.76

* Sharp falls in China, Japan spill over to Europe

* Oil tumbles; dollar, government bonds firmer

By Natsuko Waki

LONDON, Aug 17 (Reuters) - World stocks fell by nearly 2 percent on Monday, led by sharp drops in Asia, while government bonds and the dollar rose as doubts about the strength of a global economic recovery triggered a risk asset sell-off.

The benchmark MSCI world equity index <.MIWD00000PUS> headed for its biggest one-day loss since early July. Chinese stocks <.SSEC> hit a two-month low and posted their biggest daily drop in 9 months, having rallied more than 85 percent since January.

Friday's data showing a further deterioration in U.S. consumer confidence overwhelmed a report on Monday that Japan became the third G7 country after Germany and France to pull out of recession.

"There is now a realisation that coming out of a recession is one thing, but building a recovery is another," said Justin Urquhart Stewart, director at Seven Investment Management.

"We are now down to how companies are going to grow. The growth we have seen out of Japan as well as Europe looks like it has been primarily based on government stimulation ... The question is, is this sustainable?" MSCI world equity index <.MIWD00000PUS> was down 1.9 percent, having hit a 10-month high on Friday. The FTSEurofirst 300 index <.FTEU3> lost 2 percent.

U.S. stock futures were down more than 2 percent, pointing to a weaker open on Wall Street later. Friday's data from the Reuters/University of Michigan surveys showed consumer confidence fell more than expected in early August, hitting its lowest level since March.

"We seem to have been a bit spooked with the U.S. consumer confidence figures and that has followed through into the Far East," said David Morrison, market strategist at GFT Global.

"It all just feels like we're running out of steam. We've had a great summer so far... It might be the start of a realisation that we have really overcooked this."

Emerging stocks <.MSCIEF> fell 3.2 percent.

CHINA FEARS

Shanghai stocks <.SSEC> fell 5.8 percent to their lowest close in two months on worries about added share supplies and commodity price declines. The index is down more than 17 percent from its 14-month high hit a fortnight ago.

According to Thomson Reuters data, the price to earnings ratio -- a valuations measure -- on Shanghai stocks has nearly doubled to 28 times since the start of the year following the rally. This compares with the P/E ratio of 15.7 times on the S&P 500 index <.SPX>.

U.S. crude oil fell 2.5 percent to a two-week low of $65.80 a barrel.

The September Bund futures rose 30 ticks to a two-week high. In Britain, the yield on two-year gilts hit a new all-time low of 0.852 percent as prices surged.

The dollar <.DXY> rose 0.7 percent against a basket of major currencies while the yen was 0.15 percent firmer at 94.64 per dollar.

"A creeping rise in risk aversion could provide the dollar with a temporary boost," Citi said in a note to clients.

"A more decisive market correction could be triggered by a resumption of flows into the market and/or evidence that China lacks control over its overheating economy and its frothy financial markets. We expect the yen to remain well bid in this context." (Additional reporting by Joanne Frearson and Harpreet Bhal; editing by Stephen Nisbet)