Asian stocks tumbled on Thursday, following a slide on Wall Street, as investors took fright at a warning by the Federal Reserve that the United States faced a grim economic outlook with significant downside risks.

The dollar rose on the prospect of higher short-term interest rates after the Fed said it would sell $400 billion of short-term Treasury bonds to buy longer-dated debt in a widely predicted move known as Operation Twist, aimed at stimulating the economy by forcing down long-term borrowing costs.

But it was the central bank's bleak assessment of the world's biggest economy that preoccupied markets, with oil and copper falling alongside stocks on fears of weakening demand, while some were disappointed that there were no bolder stimulus moves, given the extent of the Fed's pessimism.

To be honest, I'm surprised to see so much risk aversion after the Fed, said Teppei Ino, a currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

I didn't think that many people had expected the Fed to expand its balance sheet, but it seems like some had been wishing for a bolder easing move.

Selling accelerated on Asian stock markets after HSBC's China Flash PMI survey showed factory output fell for a third consecutive month in September, pointing to a slowdown in the world's second largest economy.

Japan's Nikkei <.N225> fell 2 percent, while MSCI's broadest index of Asia Pacific shares outside Japan dropped 4.3 percent to a 14-month low, putting it nearly 25 percent below its 2011 high in April. <.T>

The twin fears of U.S. recession and a banking crisis brought on by Europe's sovereign debt woes have haunted equity markets in recent months and fueled a sharp sell-off in early August, when the MSCI Asia ex-Japan index's biggest one-day fall was 4.5 percent, and renewed weakness this month.

TWIST FAILS TO STIR

Operation Twist is the latest in a series of steps aimed at reviving an economy that has struggled to rebound from the 2008 financial crisis.

But investors worry that the Fed's latest plan will have little effect on lending in an economy that appears to be stagnating, which the Fed also noted.

U.S. stocks suffered their worst one-day drop in a month after the central bank wrapped up its two-day policy meeting on Wednesday, with the S&P 500 index <.SPX> falling nearly 3 percent. S&P index futures traded in Asia fell 0.8 percent, suggesting further weakness when trading resumes. <.N>

The dollar rose broadly, with the dollar index <.DXY>, which measures the greenback against a basket of major currencies, gaining 0.9 percent to a seven-month high.

As investors sought safety in the highly liquid dollar, currencies of emerging economies such as the Brazilian real and the South African rand made their biggest daily losses since the 2008 crisis.

The euro eased to $1.3535, heading back toward a seven-month low of $1.3495 struck last week, and hit a 10-year trough versus the yen -- another benefactor of dampened risk sentiment -- at 103.67 before recovering to trade around 104.

Japanese government bonds also gained, with the benchmark 10-year yield falling as much as 2 basis points to 0.965 percent, its lowest since November.

The Australian dollar, sensitive to expected demand for commodities -- especially from China -- fell below parity with the U.S. dollar for the first time since August 9.

Oil and copper, both influenced by expectations of industrial demand, slipped further.

Brent crude was down 1.6 percent at $108.63 a barrel and U.S. crude lost 2 percent to $84.21. Copper fell more than 3 percent to $8,045 a tonne, its lowest level since November.

(Additional reporting by Antoni Slodkowski in Tokyo; Editing by Kavita Chandran)

China Japan