World stocks fell and the dollar hit a record low against the euro on Wednesday after signs of fresh woes in the U.S. high-risk mortgage sector rekindled concerns about the potential impact on the wider economy.

Credit spreads burst even wider, while investors seeking safe havens rushed to buy government bonds.

The latest jitters started on Tuesday after two leading ratings agencies started slashing ratings for more than $17 billion of U.S. mortgage-related debt -- representing around three percent of the total subprime market.

Subprime mortgages constitute around a fifth of total U.S. annual mortgage lending but a fallout could threaten banks with bad debts, raising borrowing costs and hurt corporate earnings.

There are rising concerns on credit so we see volatility pushing higher, stock markets being down, credit spreads sharply widening... this is to the benefit of govvies. We are clearly in a traditional flight to quality environment, said Patrick Jacq, euro zone interest rate strategist at BNP Paribas in Paris.

The FTSEurofirst 300 index of top European companies fell more than 1 percent on the day, coming off Tuesday's 6-1/2 year high. Banking shares were the worst hit, while a stronger euro hit exporters.

The iTraxx Crossover index, a barometer for European credit market sentiment, burst through 300 basis points -- levels not seen since June 2006.

There is increased nervousness and capitulation, a credit trader said.

Spreads on 10-year U.S. interest rates swaps have moved to their widest levels over U.S. Treasuries since mid-2003.

Wall Street was set for another day of losses with U.S. stock futures down up to 0.4 percent.

The September Bund future was up 51 ticks.

RISK REPRICING?

On Tuesday, top U.S. housing-related firms Home Depot and D.R. Horton cut their outlooks, citing the deteriorating U.S. housing market, in a sign that the housing sector problems could spread to the bigger economy.

The housing woes boosted the view the Federal Reserve might cut interest rates when other major economies are tightening policies, enriching yields on their currencies. The dollar hit a record low versus the euro and a 26-year trough versus sterling.

Credit markets have been a major destination for foreign investors over the past 4 years and flows into credit products have been an important source of current account financing for the U.S., so prolonged impairment in that market could interrupt an important source of dollar demand, UBS said in a note.

Subprime scares have spooked global financial markets earlier this year but markets were quick to bounce back as investors stay confident about robust world growth.

A material cross-market repricing of risks has yet to happen this time. Goldman Sachs said the average GDP-weighted two-year rates in major G7 economies have repriced higher over the past two weeks and the curve stood 15bps steeper than levels in early June, reflecting upbeat views on growth.

This week's rise in oil prices could sap investor risk appetite further. London Brent crude steadied on Wednesday, having hit an 11-month high the previous day on new tensions surrounding Iran.

Gold rose to a one-month high on a weak dollar.

BNP Paribas Mortgage