* Global equities slide on fear of worldwide recession
* Dollar retreats after rising to a two-year high vs euro
* Oil prices fall to $63 a barrel, but off 17-month low (Recasts; adds U.S. markets, byline; changes dateline; previous LONDON)
By Herbert Lash
NEW YORK, Oct 27 (Reuters) - Risk aversion swept financial markets on Monday as fears of a global recession bolstered the dollar and yen while driving equities around the world lower, sending both U.S. and European stocks to five-and-a-half-year lows.
Pessimism about the deteriorating global economic outlook pushed the price of crude oil to a 17-month low below $62 a barrel at one point and sent the yen to an almost 13-year peak against the dollar on risk aversion.
Major U.S. stock indexes closed down more than 2 percent
after a see-saw session in which investors cheered the solid
wireless sales at Verizon Communications Inc
Trading was volatile and volume was light in New York, with stocks falling sharply in the last half hour of trading. With just four days left in October, the S&P 500 is on track for its worst month ever in the post-World War Two period.
Hedge funds and mutual funds have been dumping stocks to raise cash to meet redemptions from their clients, traders noted, exacerbating the late-day selling.
Earlier in Europe, shares fell to a five-and-a-half-year closing low following a plunge in Japan that pushed stocks to 26-year closing lows. Most other Asian markets also fell heavily in chaotic trade as investors feared a flurry of central bank moves would not be enough to stave off a global recession.
"It is so negative out there, you felt like a skater without any skates: it couldn't stay up," said Angel Mata, managing director of listed equity trading, Stifel Nicolaus Capital in Baltimore.
"People right now are expecting the worst; a total collapse of the hedge fund industry with half of them (hedge funds) not existing any more. Mom and pops with 401ks are saying, I have had enough and don't want to be in there any more," Mata said.
The Dow Jones industrial average <.DJI> closed down 203.18 points, or 2.42 percent, at 8,175.77. The Standard & Poor's 500 Index <.SPX> shed 27.85 points, or 3.18 percent, at 848.92. The Nasdaq Composite Index <.IXIC> slipped 46.13 points, or 2.97 percent, at 1,505.90.
Energy companies led the decline on bets a deep global
slowdown will sap demand for energy. ConocoPhillips
Technology shares also weighed on the broader market, with Microsoft a top drag on Nasdaq after The Wall Street Journal reported that defaults on tech financings -- loans that let companies buy computers, software and other products -- have spiked this year.
Verizon closed up 10 percent at $27.61.
The dollar climbed to its strongest level against the euro in about two and a half years, while the yen hovered near 13-year peaks against the dollar. The yen also rose to its highest level since May 2002 versus the single euro zone currency despite concern by Group of Seven finance officials about its excessive volatility.
Both the dollar and yen have been the biggest beneficiaries of global capital flows as investors unwind carry trades, which use the low-yielding Japanese currency to buy everything from higher-yielding currencies to stocks and commodities.
"This is a continuation of deleveraging and unwinding of risk that has been happening the past week and this has benefited the yen and the dollar," said Omer Esiner, senior market analyst at Ruesch International in Washington.
The FTSEurofirst 300 <.FTEU3> index of top European shares closed down 1.7 percent at 816.04 points -- the lowest close since May 2003.
The chemicals sector weighed heavily on the benchmark
index, with BASF
Fear of a global recession remained high in other markets, too, helping push the yield on two-year bunds
The price of U.S. government debt, which moves in the opposite direction of yield, was capped by a slight improvement of sentiment in short-term funding markets, helped by a Federal Reserve program to buy commercial paper.
But most Treasury debt turned lower.
The benchmark 10-year U.S. Treasury note
The dollar rose against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.54 percent at 87.023.
The euro
U.S. light crude for December delivery
Oil prices have dropped by nearly 60 percent from a record high $147.27 a barrel in July as global economic turmoil dents fuel consumption around the world.
Gloom about the world economy has had a greater impact than a decision by the Organization of Petroleum Exporting Countries on Friday to chop output by 1.5 million barrels per day.
"What OPEC did is constructive, but right now that is beside the point," said Mike Wittner of Societe Generale.
New York gold futures rose as an intraday rebound in the battered U.S. stock market provided support to commodities despite the stronger dollar.
The December gold contract
Japan's Nikkei index <.N225> swung wildly overnight in Asia, before ending down 6.4 percent at its lowest close since 1982. The MSCI index of Asian stocks outside Japan <.MIAPJ0000PUS> fell for a fourth consecutive session, losing 3.2 percent. (Additional reporting by Ellis Mnyandu, Gertrude Chavez-Dreyfuss, John Parry in New York and Jane Merriman and Jan Harvey in London and Sarah Marsh and Tyler Sitte in Frankfurt; Editing by Leslie Adler)