LONDON (Reuters) - Growing concerns about deteriorating emerging European economies hit European shares and the euro on Tuesday, driving capital to safer government bonds and gold.

World stocks fell to a two-week low while oil tumbled as concerns intensified about the impact on corporate profits from the shaky financial sector and a globalized economic slowdown.

The common currency hit a two-month low against the dollar after credit rating agency Moody's said the recession in the emerging economies of Europe was likely to be more severe than elsewhere. This would put the financial strength rating of local banks and their Western parents under pressure.

The news on emerging Europe is important, especially for countries like Austria and Germany and for certain banks. The focus today is on the banks but it is also valid for the manufacturing sector, said Gerhard Schwarz, head of global equity strategy at UniCredit in Munich.

Any further escalation of troubles in emerging Europe would make more capacity cuts necessary and make it harder for the manufacturing base to get ahead of the curve in terms of cost cutting and inventory reduction.

The euro lost more than 1 percent to a low of $1.2603. The FTSEurofirst 300 index of leading European shares .FTEU3 lost 1.9 percent to hit a three-week low. MSCI world equity index .MIWD00000PUS fell 1.6 percent, hitting its weakest since February 2. Emerging stocks .MSCIEF lost almost 3.5 percent.

After a holiday on Monday, Wall Street was set to open weaker with U.S. stock futures down around 2 percent.

Wal-Mart stores (WMT.N) posted a quarterly profit which beat Wall Street expectations, boosting its shares up 1 percent in pre-market trading.

EMERGING WOES

Western European banks led by UniCredit (CRDI.MI), Erste Group Bank (ERST.VI), Raiffeisen International (RIBH.VI) and Societe Generale (SOGN.PA) have bought up most of emerging Europe's banking sector in recent years to tap the rampant credit growth that fueled the region's boom.

People are beginning to speculate that East Europe is maybe the euro zone's subprime, said Adam Cole, head of FX strategy at RBC Capital Markets.

A fresh wave of risk aversion this week has drawn funds into safer government bonds. The yield on two-year euro zone debt fell to 1.172 percent, its lowest on record.

However, within the euro zone, risk aversion flows are fuelling capital into liquid German debt, driving spreads between Greek, Dutch, Austrian and Portuguese debt and German paper to their widest levels on record.

The March bund futures rose 17 ticks.

Spot gold rose 2 percent to $962.95 an ounce, its highest in seven months. Gold, priced in the euro, sterling, the South African rand and the Canadian dollar, hit record highs.

The dollar .DXY rose 1.1 percent against a basket of major currencies.

The yen was down 0.2 percent at 91.94 per dollar after Japanese Finance Minister Shoichi Nakagawa said he would resign, despite denying he was drunk at a Group of Seven news conference in Rome on the weekend.

U.S. crude oil fell 1.7 percent to $36.88 a barrel, pressured by concerns that a slowing economy would hit energy demand.

(Additional reporting by Sitaraman Shankar and Kirsten Donovan; Editing by Victoria Main)

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