Poor corporate earnings and renewed worries about credit rattled investors on Tuesday, while record high oil prices threatened to add pressure to world growth.

European, Japanese and emerging market stocks fell sharply, Japan's yen rose sharply as currency traders shunned riskier bets, bond prices rose and gold was at a fresh 28-year high.

There is a bit of focus on risk aversion, with the global equity markets in a sell-off sentiment, said Niels Christensen, FX strategist at Nordea in Copenhagen.

Oil rose over half a dollar to its third consecutive record high, extending the previous day's 3 percent rally, triggered by tension between Turkey and Iraq and anxiety over winter supply.

U.S. crude was up 68 cents at $86.81 a barrel after climbing $2.44 on Monday. London Brent crude rose 50 cents to $83.25, the first time it has traded above $83.

Although longer term such prices may start to weigh on sentiment about the global economy -- and add to inflation pressures -- equity investors were more immediately exercised by corporate earnings worries.

A poor third-quarter performance is one of the factors investors have suggested could derail the more than 4-year bull market in stocks which has taken global equities to a series of all-time highs.

European stocks fell sharply after telecoms equipment group Ericsson (ERICb.ST: Quote, Profile, Research) warned of lower-than-forecast third-quarter earnings. The FTSEurofirst 300 index was down 0.9 percent having suffered its biggest daily loss in three weeks in the previous session.

The Ericsson warning added to pressure that set in on Monday when banking giant Citigroup issued a gloomy outlook mainly based on credit worries.

Earlier on Tuesday, Japan's Nikkei stock average fell 1.3 percent or 220.23 points to 17,137.92. The broader TOPIX index slid by 1.9 percent to 1,625.25.

RISK AVERSE

On foreign exchange markets, the yen rallied from the previous day's two-month lows versus the euro and dollar while the New Zealand dollar fell sharply as the sell-off in equities underlined a diminished appetite for risk.

Reduced risk appetite prompts investors to scale back carry trade investments where cheap borrowing in the low yielders like the yen funds purchases of higher return currencies such as the New Zealand dollar.

The dollar was down a third of a percent at 116.94 yen, retreating from Monday's two-month high of 117.94.

The euro fell 0.6 percent to 165.83 yen after hitting 2-1/2 month peaks of 167.72 the previous day. The New Zealand dollar, a carry trade favorite, fell 2 percent to 87.69 yen.

The euro fell 0.3 percent to $1.4173.

Euro zone government bond prices rose.

Yields on the benchmark 10-year Bund were 1.2 basis points lower at 4.418 percent while the two-year Schatz yield was 2.6 basis points down at 4.193 percent, pulling back slightly from its highest levels since mid-July.

(Additional reporting by Toni Vorobyova)

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