By Helen Reid
LONDON (Reuters) - World stocks went south and European assets sold off on Tuesday after anti-euro comments from an Italian party official weighed on the single currency and sent Italy's bond yields up to multi-year highs.
A boost to investors' risk appetite from the new U.S.-Mexico-Canada trade pact proved short-lived with the MSCI world equity index falling back 0.3 percent.
The leading index of euro zone stocks lost 0.8 percent while the pan-European STOXX 600 fell 0.5 percent, tracking Asian stocks lower and extending losses as Italian assets were under renewed stress.
Italian government bonds sold off after the economic head of the ruling League party said most of Italy's problems could be solved by having its own currency.
Italian 10-year bond yields hit a new 4 1/2 year high and shares in Italian banks, which have large sovereign bond holdings, sold off sharply to hit a 19-month low, down 2.8 percent. Italy's FTSE MIB tumbled 1.4 percent.
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Euro zone banks also dropped 1.3 percent as the comments reignited investors' anxieties about contagion to euro zone finances from Italy's higher budget deficit plans, which the government set out on Thursday.
"While our economists do not expect systemic implications for the global economy, contagion risks have risen," said Goldman Sachs analysts.
"We think European risky assets remain vulnerable and there is potential for negative spillovers to the Euro area given the high trade exposure to Italy."
The euro fell 0.3 percent, briefly touching its lowest since Aug 21 at $1.1523 and last trading at $1.1536.
The single currency has been hurt by concerns that a significant increase in the Italian budget will deepen Italy's debt and deficit problems, and by extension the European Union's.
"The history of the euro zone tends to be one of great fudges - think of the case of Greece," said David Keir, manager of the global income and growth fund at Saracen.
"But I would caution against any wider systemic spreading. The reality is making kneejerk reactions to big political decisions can very much be the wrong thing to do," he added.
DOLLAR GRINDS EMERGING MARKETS DOWN
Asian stocks were lower as the lift from an agreement that saved the North American free trade deal faded.
China's financial markets are closed for the week of Oct. 1-5 for national holidays, but China's weaker manufacturing PMI surveys also hit Hong Kong stocks.
The United States and Canada forged a last-minute deal on Sunday to salvage NAFTA as a trilateral pact with Mexico, rescuing a $1.2 trillion open-trade zone that had been about to collapse after nearly a quarter century in operation.
The trade pact helped the dollar index rise 0.2 percent to 95.594, its highest since Sept 5.
The dollar at a three-week high weighed on emerging markets stocks which suffered their biggest one-day losses in a month.
The greenback drew support from an uptick in U.S. Treasury yields as Wall Street gains curbed demand for safe-haven debt.
Oil prices recoiled slightly, having hit nearly four-year highs in the previous session.
Crude contracts surged nearly 3 percent to $75.77 a barrel, their highest since November 2014, as the deal to salvage NAFTA stoked economic growth expectations, with impending U.S. sanctions on Iran seen raising prices.
U.S. crude futures were up 0.3 percent at $75.52 a barrel.
Brent crude edged down 0.2 percent to just under the $85 a barrel level, after rallying 2.7 percent the previous day to a $85.45, highest since November 2014.
(Reporting by Helen Reid; Editing by Andrew Heavens)