Asian and European stocks fell on Monday while sterling hit a one-year low as concerns over financing for banks grew after UK mortgage lender Northern Rock tapped the Bank of England for an emergency loan last week.

Safe-haven government bonds rose as a result, while the dollar held near last week's 15-year low against major currencies ahead of an expected U.S. interest rate cut this week.

The Northern Rock woes are fanning concerns that more financial institutions may have been hit by high interbank lending rates even though money markets have showed signs of stabilizing.

The recent rise in interbank lending rates could also squeeze corporates and other borrowers, which would in turn weigh on companies' profits and slow consumer spending.

The current Northern Rock situation will put a renewed focus on a link between consumption and housing. There will be tighter lending standards in the next 12 months at a time when the leverage is at a record high, said Michael Metcalfe, senior strategist at State Street.

In certain areas of the global economy like in the U.S. and UK it will be remarkable if we didn't get a sharp slowdown in consumption.

The MSCI main world equity index was down 0.5 percent, while the FTSEurofirst 300 index fell more than 1.2 percent on the day.

Northern Rock shares fell more than 30 percent, adding to their 32 percent plunge on Friday. Other UK mortgage lenders fell across the board, while French banks were also hit.

Credit concerns also hit Asian shares, halting four straight weeks of gains. MSCI's measure of Asian stocks excluding Japan fell 0.8 percent. Japanese markets were closed for a public holiday.

Sterling fell to its lowest since October 2006 on a trade-weighted basis and hit a new 14-month low versus the euro.

The dollar held off its 15-year low against a basket of major currencies ahead of the Federal Reserve's monetary policy meeting outcome on Tuesday.

Investors expect the Fed to cut interest rates by as much as 50 bps from the current 5.25 percent.

Money markets stabilized further despite the turmoil in stock markets. Three-month sterling deposit rates hit a three-week low of 6.58 percent, according to prices indicated on Reuters.

However, three-month rates are still more than 80 points above the BoE's benchmark interest rate, having risen from levels below 6 percent early in August. This puts pressure on financial institutions which rely on interbank-based lending for funding.

It looks as though the funding environment for mortgage lenders will remain challenging into year end, forcing lenders to pass on higher costs to mortgage borrowers and accelerating the downturn in the UK housing market, ING said in a note to clients.

The cost of insuring Northern Rock's debt against default widened by 20 bps to 175 bps. The iTraxx Crossover index, the mostly-widely watched indicator for European credit market sentiment, widened slightly from Friday.

Emerging sovereign spreads tightened 1 bps. The December Bund future was up 13 ticks.

London Brent crude oil fell 0.6 percent after U.S. crude hit a record high last week. Prices slipped after tropical storm Ingrid faded in the Atlantic over the weekend, soothing fears it could hit production and refining in the Gulf of Mexico.

Gold stood at $711.40 an ounce, near last week's 16-month high.

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