* Bank shares drive world stocks to 3-month low after Brexit
vote
* Wall Street set to follow Europe and Asia lower
* Sterling drops more than 3 percent to fresh 31-year low
* Safe havens in demand; Japan raises yen intervention
rhetoric
* Bond yields drop, Spain outperforms after Sunday election
By Nigel Stephenson
LONDON, June 27 (Reuters) - European bank shares and
sterling were on track for their biggest two-day slides on
record on Monday as the fallout of Britain's shock vote to quit
the European Union sowed turmoil in global financial markets for
a second day.
U.S. index futures were down 0.7 percent ESc1 1YMc1 ,
indicating Wall Street would follow European markets down.
Investors sought safe havens such as the yen, gold and
low-risk government debt. Moves were not as extreme as on Friday
when stocks fell by their most in almost five years but the
combined falls on Friday and Monday broke records in some
assets.
British finance minister George Osborne sought to reassure
markets, saying the world's fifth-largest economy was strong
enough to cope with the Brexit-inspired volatility, but the
positive impact on sterling was only fleeting.
"This Brexit decision has taken the markets by total
surprise. I would remain on the sidelines - no reason to step in
yet," said Hampstead Capital hedge fund manager Lex Van Dam.
Markets bet on a further cut in Bank of England interest
rates, almost fully pricing in a 25 basis point cut by the end
of the year in another blow to sterling and to banks already
facing reduced earnings as a result of Britain leaving the EU.
An index of European bank shares .SX7P fell 7.5 percent,
taking the decline in the last two trading days to around 20
percent, equating to a loss of 168 billion euros in market
capitalisation. Royal Bank of Scotland shares RBS.L fell 23
percent while Barclays BARC.L shed 18 percent.
Italian banks also suffered. UniCredit CRDI.MI fell 7.7
percent. The government was looking at options to help its banks
and prevent further share price falls.
The pan-European FTSEurofirst 300 stocks index .FTEU3 ,
which fell 7 percent on Friday in its biggest plunge in nearly
eight years, lost a further 2.9 percent on Monday, for its
biggest two-day fall since the aftermath of the Lehman collapse
in 2008.
Britain's FTSE 100 index .FTSE ebbed a further 2.1 percent
on Monday and Germany's DAX .GDAXI lost 2.2 percent.
Spain's IBEX index .IBEX initially rose after acting prime
minister Mariano Rajoy's People's Party fared better than
expected in weekend elections but the gains melted away and the
index was last down 1.4 percent.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
World stocks measured by MSCI .MIWD00000PUS hit their
lowest level since March, down 0.9 percent. The index's fall
since the Brexit vote was its biggest since last August when
sharp falls in Chinese shares slammed work markets.
Sterling fell nearly 4 percent to $1.3152, surpassing its
Friday low as yields on 10-year British government debt fell
below 1 percent for the first time GB10YT=RJR .
It fell 2.5 percent to 83.33 pence against the euro
EURGBP= and 3.9 percent to about 134 yen GBPJPY= .
"Uncertainty equals currency weakness, we know this, and
there is no sense that this (sterling) is a value trade right
now and that you have to get back in. It is too early for anyone
to start calling a bottom," said Neil Mellor, a currency
strategist at Bank of New York Mellon (NYSE:BK) in London.
The euro EUR= , also seen vulnerable to the exit from the
EU of its second-largest economy, fell 1.3 percent to as low as
$1.0969. The yen firmed to as high as 101.37 per dollar JPY= .
Government officials stepped up warnings that they could
intervene in currency market to stabilise the yen, whose
strength harms exporters.
This helped Japan's Nikkei 225 .N225 share index, which
closed 2.4 percent higher. MSCI's broadest index of Asia-Pacific
shares outside Japan .MIAPJ0000PUS fell 0.4 percent. Companies
with UK exposure in particular came under pressure.
Yields on core government debt fell again. German 10-year
bond yields DE10YT=TWEB , the benchmark for euro zone borrowing
costs, fell as low as minus 0.11 percent but held above Friday's
record low of almost minus 0.17 percent.
OUTPERFORM
Spanish 10-year bonds ES10YT=TWEB outperformed those of
other lower-rated southern euro zone countries. Their yields
were down 18 bps at 1.46 percent after Sunday's election.
U.S. Treasury yields also fell. The 10-year note US10YT=RR
fell more than 10 bps to as low as 1.46 percent, still above
Friday's low of 1.41 percent.
Gold XAU= , which saw its biggest rise since 2009 on
Friday, stood at $1,329 an ounce, up 1.1 percent on the day.
Brent crude oil LCOc1 was higher in Asian trade on a view
that Brexit would have minimal impact on global oil demand. But,
by midday in London, it was down 18 cents at $48.23 a barrel.
(Aditional reporting by Hideyuki Sano in Tokyo, Nichola
Saminather in Singapore, Patrick Graham, Alistair Smout and
Dhara Ranasinghe in London; Editing by Toby Chopra)