* US dollar seen dropping; Swiss franc, yen likely gainers
* Some global investors question S&P downgrade
* U.S. downgrade exacerbates growth worries
* ECB to decide on Italian bond purchases (Updates prices, adds quotes, changes byline, dateline; previous LONDON)
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 7 (Reuters) - The U.S. dollar is likely to take a further beating against the Swiss franc and Japanese yen on Monday, while global stocks could tumble after the United States lost its top-tier credit rating from Standard & Poor's.
Losses against the euro, however, could be tempered by the euro zone's escalating debt crisis as officials there discuss ways to reduce borrowing costs for large euro zone economies Spain and Italy.
The dollar's fall against the safe-haven Swiss franc and yen could be limited by possible intervention by the Bank of Japan and Swiss National Bank to stem their surging currencies.
Stocks in Tel Aviv <.TA25>, one of the first global equity markets to open since the downgrade, dropped over 6 percent on Sunday in response to S&P's action late on Friday to cut the U.S. long-term credit rating by a notch to "AA-plus" from "AAA."
The move by S&P drew criticism from some of the world's largest investors. For the S&P story, click on [ID:nLDE77500Z]
"Obviously, we're going to get freaked out a little bit and the dollar will get hit, but it's only going to be for a couple of days," said John Taylor, chairman and chief executive officer of FX Concepts, the world's largest currency hedge fund.
Over the past month, the dollar shed 6 percent against the Swiss franc
"This downgrade is not that important and if you ask me, too silly. The U.S. is in a much better position than any, I repeat, any European country," Taylor added.
It was not yet clear whether European policymakers would be able to come up with measures to allay concerns about their own region's fiscal crisis, though all the signs were that they were keenly aware of the importance of reassuring markets.
Sources said the European Central Bank will hold a conference call at 1700 GMT to decide whether to buy Italian government bonds in the secondary market. [ID:nL6E7J704K]
One ECB source said that if the ECB council opted to intervene on Italy, the ECB and national central banks would start buying Italian bonds when markets open on Monday.
The ECB last week resumed its purchases of government bonds in the secondary market after an 18-week hiatus, but its decision to restrict such purchases to Irish and Portuguese bonds led to sharp declines in Italian and Spanish bond prices, and borrowing costs soared to 14-year highs.
"There is no reason why the ECB cannot simply go ahead and imply that they are going to support the Italians and the Spanish," said Mike Lenhoff, chief strategist at Brewin Dolphin in London. "It is better that they don't say anything, but go in and show there is another side to the market."
Any ECB buying would offer relief to beaten-down Italian and Spanish bonds, although the extent of any rally in these bonds will depend on the size and persistence of the bank's bond purchases.
U.S. RECESSION FEARS
Worries of another U.S. recession and concern about the euro zone crisis have sparked a global stock market slump that wiped $2.5 trillion off companies' values in the past week.
The fall in global share prices, as measured by the MSCI All-Country World Index <.MIWD00000PUS>, was the biggest weekly decline since early October 2008, according to Thomson Reuters Datastream.
Consumer discretionary shares of firms dependent on external demand are likely to be singled out for more punishment.
Still, some investors believed the expected sell-off in stocks on the U.S. credit downgrade had been largely priced in and may not last long. Some expressed doubts about the S&P decision as they are well aware of questions on the S&P's calculations of the projected U.S. fiscal deficits. [ID:nN1E774236]
"The U.S. track record -- over the past 200 years -- on its ability and willingness to fully service its debt is impeccable and the debt statistics should be interpreted not in isolation but in conjunction with the flawless track record of the U.S.," said Stephen Jen, managing director of SLJ Macro Partners in London, a global macro hedge fund.
"This will have no lasting effects on financial asset prices," he added.
U.S. Treasury debt yields are also expected to rise on Monday. Yields on benchmark U.S. 10-year Treasury notes rebounded to 2.56 percent on Friday, but were not very far from a record low of near 2 percent hit during the throes of the 2007-09 global financial crisis. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on week's losses http://link.reuters.com/xus92s Euro zone crisis graphics http://r.reuters.com/hyb65p Euro zone bond spreads http://r.reuters.com/kus82s Dealers cut U.S. growth outlook [ID:nN1E7741Y9] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The sharp swings in financial markets have piled pressure on policymakers.
Finance ministers from the Group of Seven most developed economies are on Monday to discuss the U.S. sovereign rating downgrade and Europe's debt woes, Japanese news agency Kyodo reported on Sunday. [ID:nL3E7J700A]
"Be wary (Monday) of irrational depression as markets take flight," said Justin Urquhart Stewart, a director at Seven Investment Management in London. "We are dealing with the knowns and not the unknowns, but what we have a shortage of at the moment is political leadership."
Goldman Sachs strategists said there was a one-in-three probability of a U.S. recession due to the worsening European crisis, the possible failure to extend payroll tax cuts and elevated levels of joblessness, despite a slight dip in the U.S. unemployment rate in July.
That would bode ill for the benchmark MSCI all-country index, which last week hit its lowest since September 2010 and has accumulated losses of more than 12 percent since late July.
"Market sentiment appears acutely vulnerable given the build-up of concern on a sharper U.S. slowdown and speculation on the appropriate policy response and lingering fears stemming from the sovereign debt crisis in Europe," Citigroup strategists said in a note.