* Dow, S&P 500 post worst month in January on record
* U.S. GDP, euro zone inflation, Japanese data weigh
* Oil settles up on signal of more possible OPEC cuts
* Euro tumbles on weak euro zone inflation data (Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Jan 30 (Reuters) - Investors fled to the safety of gold and government debt on Friday as news of more economic weakness worldwide rattled markets and led the benchmark S&P 500 and Dow to their worst monthly declines in January ever.
The Dow Jones industrial average closed down 8.8 percent for January, a month that often is a harbinger for the rest of the year's performance. The broader S&P 500, considered the benchmark U.S. index among investors, fell 8.6 percent for the month.
Gold jumped more than 2 percent on flight-to-quality buying and record investment demand, while the price of longer-dated U.S. and euro zone government bonds rose, bolstered by demand for safe havens.
A plunge in euro zone inflation, a record fall in Japanese industrial production and the most severe shrinking of the U.S. economy in nearly 27 years heightened fears that the global downturn could be worst than many had feared.
The Dow fell 148.15 points, or 1.82 percent, at 8,000.86. The Standard & Poor's 500 Index shed 19.26 points, or 2.28 percent, at 825.88. The Nasdaq Composite Index lost 31.42 points, or 2.08 percent, at 1,476.42.
World stocks, as measured by MSCI's all-country index, fell 2 percent on Friday and closed down about 8.6 percent for the month.
U.S. stocks, led by financials, tumbled after CNBC reported that tentative U.S. government plans to mop up toxic assets by placing them in a "bad" bank were on hold.
"The banking system is still in crisis mode," said Dean Barber, president of investment firm Barber Financial Group in Kansas City. "We're in for another tough year."
Sparking an initial slide in equities was a report that showed U.S. gross domestic product fell at a 3.8 percent annual rate in the fourth quarter, not as bad as economists expected.
But business equipment and software spending plunged 27.8 percent and exports fell 19.7 percent, indicating the first quarter will be tougher than many economists had thought.
"That amount of inventory accumulation is not voluntary because businesses couldn't sell as much as they want," said William Cheney, chief economist at John Hancock Financial in Boston. "If these numbers hold up, that means the first quarter will be worse. This is postponing the day of reckoning."
In news that unsettled investors, Procter & Gamble Co
P&G was the Dow's biggest drag, off 6.4 percent.
European shares gyrated in a choppy session. The pan-European FTSEurofirst 300 index closed little changed, up 0.03 percent at 796.76 points.
Miner Xstrata was Europe's top loser, dropping 11.8 percent, while BHP Billiton fell 7.4 percent, the biggest drag to the European index, as copper prices fell.
Oil shares also fell, with BP down 0.9 percent and Royal Dutch Shell off 3.4 percent.
The euro weakened against the dollar as the data further underlined the region's vulnerability, but shorter-dated euro zone government bonds rallied on speculation the European Central Bank will cut interest rates earlier than expected.
The euro fell 1.39 percent at $1.2778.
The dollar was on track for its best month since October versus the euro, as signs of a prolonged slump on both sides of the Atlantic added to the greenback's appeal as a safe haven.
The dollar rose against a basket of major currencies, with the U.S. Dollar Index up 0.62 percent at 86.019. Against the yen, the dollar gained 0.03 percent at 89.96.
Inflation in the euro zone plunged in January to its lowest in almost 10 years and unemployment rose more than expected, boosting pressure on the ECB to cut rates further.
"The inflation number was definitely a shock, a much bigger-than-expected drop, and just shows how strong disinflationary pressures are in Europe," said Matthew Sharratt, an economist at Bank of America.
In Japan, industrial production fell a record 9.6 percent in December while core annual inflation almost evaporated, reinforcing expectations of a record economic contraction as the global financial crisis worsens.
Japan's Nikkei share average fell 3.1 percent, while stocks in Asia-Pacific outside Japan were off 0.3 percent.
The benchmark 10-year U.S. Treasury note gained 4/32 in price to yield 2.85 percent. The 30-year U.S. Treasury bond rose 8/32 in price to yield 3.60 percent.
Oil futures rose after the Organization of Petroleum Exporting Countries signaled it may deepen its record output cuts. U.S. crude rose 24 cents to settle at $41.68 a barrel. London Brent crude settled up 48 cents at $45.88 a barrel.
Gold rallied to a near four-month high. U.S. gold futures for April delivery settled up $21.90 at $928.40 an ounce in New York. (Reporting by Ellis Mnyandu, Gertrude Chavez-Dreyfuss, Chris Reese, Frank Tang in New York; Lucia Mutikani in Washington; Rebekah Curtis, Kirsten Donovan and Chris Baldwin in London; Jan Strupczewski in Brussels; writing by Herbert Lash, Editing by Kenneth Barry)