/www.fxserver.com/ By Nigel Stephenson
LONDON, Jan 29 - Stocks and the dollar fell on Wednesday after President George W. Bush promised to deliver new intelligence on Iraq's alleged arms programmes and vowed to use the full force of the U.S. military to disarm Iraq if necessary.
Safe-haven government bond prices rose but gold edged down and oil held steady after Bush's annual State of the Union address on Tuesday in which he said Secretary of State Colin Powell would deliver new intelligence on Iraqi weapons of mass destruction next week.
"Bush's speech was fairly belligerent to my ears. The two key things are that he sounds prepared to go it alone without U.N. approval," said Nomura global strategist Anais Faraj.
Markets have been concerned that signs of disagreement between key western allies diminish the chances of cooperation on the ailing global economy.
"The other point is he is going to do it soon. I think we're still looking at a war situation at the end of February, early March," Faraj said.
European shares fell to their lowest in six years before regaining some of the lost ground. The FTSE Eurotop 300 index of pan-European blue chips was down 1.54 percent at 1045 GMT while the narrower DJ Euro STOXX 50 index was off 1.69 percent. The Eurotop index earlier hit its lowest since January 1997.
"Bush has confirmed in his speech that a war is going to happen and that's why the markets are down," said Nigel Cobby, managing director of European Equities at JPMorgan.
Insurers such as Aegon and ING were among the fallers as investors worried about insurance companies' vulnerability to further falls in stocks.
Tokyo shares fell on war fears, the Nikkei indeended down 2.28 percent at an 11-week low, with technology giant Fujitsu, down 8.68 percent, leading a broad retreat.
However, Sony Corp , reporting as the market closed, said its latest quarterly profit doubled. Sony, the world's largest maker of consumer electronics, kept its earnings targets for the year unchanged.
U.S. STOCKS LOOK SET TO FALL
U.S. stock index futures were down, indicating Wall Street would open lower.
Better than expected consumer confidence data and reassuring corporate forecasts had helped push U.S. stocks higher. The Dow Jones Industrial average closed 1.24 percent higher and the tech-heavy Nasdaq rose 1.28 percent on Tuesday.
The dollar retreated against major currencies, heading back towards a three-year low against the euro . The greenback last stood at $1.0876, down half a percent on the day. It hit a three-year low at $1.0907 on Monday. The dollar was also down half a percent against the safe-haven Swiss franc at 1.3496 and at 118.13 yen .
"When you go through the speech it looks like he's beating the war drum even harder now. People are more and more resigned to the fact that war is on the horizon and that's a dollar negative scenario," said Paul Mackel, currency strategist at Dresdner Kleinwort Wasserstein.
Financial markets were also awaiting the outcome of the U.S. Federal Reserve's interest rate setting meeting later on Wednesday. No change in the cost of borrowing was expected even though the world's largest economy is stalling.
Gold, seen as a safe place for investors to put their money in troubled times, paused in Europe. Spot gold was at $369.50 an ounce, unchanged from Tuesday's New York close.
"There was nothing new in his (Bush's) comments which hasn't already been factored into the gold price," Standard Bank London said in a report.
Gold has risen seven percent this year.
Oil prices were broadly steady. Brent crude for March delivery was down seven cents at $30.20 a barrel. U.S. light crude was off four cents at $32.76 a barrel.
"The market has completely accepted that there will be war and that's already in the price," said Sarah Emerson, managing director at Boston-based Energy Security Analysis (ESAI).
The yield on euro zone government bonds, which moves in the opposite direction to the price, fell as bonds were bolstered by safe-haven flows.
The two-year German Schatz note , which hit a 3-1/2-year low of 2.54 percent last week, was yielding 2.56 percent, down 5.2 basis points on the day. The benchmark 10-year Bund yield was down 3.4 basis points at 4.02 percent.