GLOBAL MARKETS-World stocks tick higher; Iceland pegs FX

* MSCI world equity index up 0.15 pct at 266.28

* UK bank shares, sterling fall on government funding talk

* Money markets stressed despite global rate cut hopes

* Iceland pegs FX, takes control of Landsbanki

By Natsuko Waki

LONDON, Oct 7 (Reuters) - World stocks ticked higher on Tuesday, a day after falling six percent to three-year lows, as Australia's surprisingly large interest rate cut raised speculation other countries may follow suit.

UK bank shares tumbled while sterling hit a 2-1/2 year low against the dollar after the British government had held talks with major banks over a possible multi-billion pound injection of public money into the sector, according to a source. Money markets remained logjammed with the cost of borrowing dollars, euros and sterling for three months all rising in London as banks remained reluctant to lend to each other.

Iceland has put local lender Landsbanki in receivership, pegged the crown to the euro and said Russia would lent it 4 billion euros to help it fight the crisis.

Earlier, Australia cut interest rates by a full percentage point to 6 percent, its biggest move in 16 years. This has boosted speculation other major countries might follow suit, especially as finance chiefs from Group of Seven rich countries meet in Washington this weekend.

Now investors are betting the Bank of England will cut interest rates by at least 50 basis points this week, after measures by Washington and other European countries to contain the credit crisis had little effect in calming frayed nerves.

"A concerted move by central banks to cut global rates would be seen as an unmitigated positive ... the market's suspecting that's the case," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"The macro backdrop is deteriorating and while the pace of the deleveraging process has taken everyone by surprise by its intensity the inevitable consequence is going to a longer and deeper economic downturn."

In a volatile session, MSCI main world equity index <.MIWD00000PUS> was up 0.15 percent, having lost more than 9 percent this month. The FTSEurofirst 300 index <.FTEU3> rose 0.5 percent after falling 7.8 percent to four-year lows on Tuesday.

"Policymakers urgently need to get some traction in their policy initiatives, if disaster is to be avoided... Policymakers cannot make any more mistakes: the clock is ticking, and it is one minute to midnight," Barclays Wealth said in a client note.

U.S. stock futures rose 0.8 percent, indicating a firmer open on Wall Street later.

PARALYSIS

In London, three-month dollar lending rates rose to 4.32 percent from 4.28875 percent, while the cost of borrowing euros and sterling also rose. This compares with market expectations, shown on interest rate futures, that the Federal Reserve would cut interest rates to 1.5 percent by January.

The low-yielding yen fell half a percent to 101.89 per dollar and fell from a five-year peak against the Australian dollar after Australia's interest rate cut. The dollar <.DXY> fell a quarter percent against a basket of major currencies. Sterling fell as low as $1.7322 .

The December Bund future fell 7 ticks as flows seeking safer government bonds eased.

Emerging sovereign spreads <11EMJ> tightened 7 basis points while emerging stocks <.MSCIEF> rose 0.1 percent, after falling more than 10 percent on Tuesday.

U.S. light crude rose 3.4 percent to $90.77 a barrel, while gold also gained to $880.70 an ounce. (Additional reporting by Simon Falush; Editing by Victoria Main)