Ukraine worries intensify flight to safety

By Marc Jones

LONDON (Reuters) - Heightened tensions between the West and Russia ahead of Ukraine's weekend referendum in Crimea pushed world stocks to their lowest in more than a month on Friday and left investors scurrying into safe-haven gold and bonds.

With the West ramping up talks of sanctions and Russia hitting back with promises of retaliatory measures and displays of military prowess, financial markets were left to watch nervously.

Wall Street was set to add to this week's losses, while a third straight day of declines on European stock markets

(.FTEU3) left them down almost one percent and potentially facing their biggest weekly drop since June when the Federal Reserve hinted it would taper economic stimulus.

Hardest hit was Moscow's MICEX (.MCX) index. It fell more than 5 percent before clawing back some of its losses to be down 2.5 percent. There was no let up for the ruble either as it rumbled along at an all-time low.

"The Ukraine is one of the most serious geopolitical situations at the moment and how it plays out is difficult to forecast," Salman Ahmed, a global fixed-income strategist at the investment arm of Swiss private bank Lombard Odier, said.

"The main risk factor is that it morphs into an unintended clash and there is bloodshed."

Part of the concern over the Crimea referendum on Sunday is that is could encourage other pro-Moscow parts of the country to follow suit and potentially embolden Russia in the region.

U.S. Secretary of State John Kerry met Russian counterpart Sergei Lavrov in London in last-ditch diplomatic efforts to defuse tensions, but Moscow and the West appeared increasingly far apart.

Russia shipped more troops into Crimea on Friday and repeated its threat to invade other parts of Ukraine, showing no sign of listening to Western pleas to back off from the worst confrontation since the Cold War.

AGGRESSION AND ESCALATION

With Russian assets continuing to slump, investors were taking the view that while the situation was hurting, Vladimir Putin and the Kremlin were unlikely to flinch.

"Obviously Russia will not back down so it all points to an escalation," Viktor Szabo, a fund manager at Aberdeen Asset Management who holds Ukraine and Russian bonds, said.

"I think it is even more important from Russia's point of view because the U.S. and Europe have been pretty clear that they see the annexation of Ukraine as a move of aggression and that they will move further in terms of sanctions."

The East-West tensions were not the only thing weighing on markets, however. Jitters also remained over the degree to which China's economy is slowing after unsettling data this weak.

Copper, seen as a proxy for China's fortunes, steadied after its dizzying 5-percent fall this week, but MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) touched its lowest level since mid-February. Tokyo (.N225) ended the week down more than 6 percent after 3.3 percent dive on Friday.

Among Europe's main indexes, Germany's DAX (.GDAXI), whose constituents are heavily exposed to Russia, saw the steepest falls as a one percent fall saw it heading for its biggest weekly drop since the height of the euro crisis in June 2012.

PLAYING SAFE

One of the reasons for the Nikkei's decline was that the latest developments in the Ukraine crisis sent the safe-haven yen soaring against both the dollar and the euro.

"Investors are unwinding their long positions in the Nikkei and short positions in the yen," Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas, said.

As U.S. trading began, the greenback was down about 0.5 percent at 101.20 yen, while the euro slipped a similar amount to 140.45 yen.

Solid U.S. retail sales and employment data on Thursday had also reinforced expectations that the U.S. Federal Reserve will stick to its plan of gradually withdrawing its asset-buying stimulus. That came after disappointing Chinese economic data.

The scuttle to safety pushed down German government bond yields after those on the benchmark 10-year U.S. Treasury note had fallen to two-week low 2.62 percent in Europe. data.

Gold, another safe-haven favorite, climbed through the day to a new six-month high of $1,376 an ounce, and was poised for its sixth straight weekly rise.

China's worries continued to weigh on the Australian dollar, considered a proxy for China plays, sending it down about 0.2 percent to $0.9009. Oil held above $107 a barrel but remained on track for its third straight weekly loss.

The euro also remained under pressure after comments from European Central Bank President Mario Draghi, who said the bank has been preparing additional policy steps to guard against deflation taking hold in the euro zone.

The single currency was steady at $1.3876, moving away from Thursday's 2-1/2-year high of $1.3967 hit before Draghi spoke.

(Additional reporting by Ayai Tomisawa; Editing by Louise Ireland)