By Tom Wilson
LONDON (Reuters) - World equity markets slumped on Thursday after the U.S. Federal Reserve dashed investor hopes of a more dovish policy outlook even as signs grow that global economic growth is stuttering.
Jitters over the Fed's move to largely keep guidance for additional hikes over the next two years spread from Asia to Europe, where major indexes fell to their lowest in two years and investors headed for the relative safety of government debt.
European shares fell 1.2 percent, with bourses in Germany, Britain and France all hitting their lowest since December 2016.
MSCI's global equity index fell to its lowest since May 2017, shedding 0.4 percent as it headed for a fifth straight day of losses.
The Fed raised key overnight lending rate rates by 0.25 percent point as expected to a range of 2.25 percent to 2.50 percent.
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It said "some further" rate hikes would be necessary in the year ahead, with policymakers projecting two rises on average next year instead of the three predicted in September, a change largely in line with expectations.
But that minor revision could not soothe market fears over a further U.S. economic slowdown on the back of trade tensions with China, a waning boost from tax cuts and tightening monetary conditions for companies.
"It appears that risky asset markets wanted a stronger 'put' from the Fed given the ongoing recession obsession taking over the market sentiment," said Salman Ahmed, global investment strategist at Lombard Odier Investment Managers.
Oil prices fell more than 3 percent, erasing most of their gains from the day before and heading back towards their lowest levels for more than a year amid worries about oversupply and the outlook for the global economy.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had earlier dropped 1 percent and Japan's Topix joined Shanghai and Hong Kong's Hang Seng in bear market territory, defined as down more than 20 percent from recent high.
BOND APPEAL
The concerns in equity markets saw investors flock to the safety of government bonds.
German 10-year government bond yields fell to their lowest in nearly seven months, and other high grade euro zone bond yields also fell.
The 10-year U.S. Treasuries yield had earlier fallen as low as 2.750 percent, a level last seen in early April.
U.S. junk bonds sold off sharply, with their ETFs falling 0.9 percent, the biggest decline since March 1.
A rise in short-term interest rates and a fall in the long-date yield rekindled worries of an inversion in the yield curve, where shorter-debt yields become higher than longer-term ones.
Historically, an inversion between short-yields, such as three-month and two-year yields, and 10-year yields has been seen as a fairly reliable indicator of a recession down the road.
The two-year U.S. yield stood at 2.656 percent, just 0.097 percent less than the 10-year yield.
The dollar fell against major currencies, losing ground after perceptions the Fed was more hawkish than anticipated.
The dollar fell 0.4 percent against its rivals to 96.68 and within a whisker of a 9-day low of 96.554 hit in the previous session.
"The impact of (the Fed's) decision, especially for foreign countries, depends on how much the dollar will go up," former ECB vice president Vitor Constancio said.
The euro gained 0.5 percent to $1.1429, slightly off a high of $1.14395 hit before the Fed's policy announcement.
In other announcements by central banks, Japan kept its policy settings unchanged, as expected.
Sweden's currency jumped more than one percent against the dollar on Thursday after the central bank raised interest rates for the first time in more than seven years.
Britain is also due to make a policy announcement later in the day, with analysts expecting the Bank of England to keep rates steady.
(Reporting by Tom Wilson and Sujata Rao; Additional reporting Tomo Uetake and Hideyuki Sano in TOKYO and Swati Pandey in SYDNEY; Editing by Sam Holmes and Andrew Cawthorne)