LONDON - WORLD stocks dropped on Monday, with heavy losses in Asia, after top finance ministers warned that the global economy faced growing threats from a US housing slump and squeeze on credit, dealers said.

With Tokyo, China and Taiwan closed for public holidays, the focus in Asia fell on Hong Kong, whose benchmark index closed down 3.6 per cent.

'Investors remained cautious as they worried that a recession in the US will hurt global economic growth and affect China as well,' said Castor Pang, investment strategist at Sun Hung Kai Financial.

European losses were modest on Monday, with London down 0.26 per cent in morning trade and Frankfurt shedding 0.20 per cent.

In Paris, where the market was flat, French bank Societe Generale announced the launch of a 5.5-billion-euro (S$11.35 billion) capital increase aimed at partially compensating for huge losses it blames on a rogue trader and the US subprime crisis.

'The G7 comments are weighing on the (London) market,' a senior trader who requested anonymity said on Monday.

Finance chiefs from the Group of Seven industrialised nations, meeting in Tokyo over the weekend, announced no new concrete measures to shore up their economies and markets in light of the recent US subprime loan crisis.

The G7 - Britain, Canada, France, Germany, Italy, Japan and the United States - warned in a joint statement that 'risks have become more skewed to the downside' in the United States.

'In all our economies, to varying degrees, growth is expected to slow somewhat in the short-term, reflecting wider global economic and financial developments' said the statement.

But US Treasury Secretary Henry Paulson said that he was confident that the US economy would avoid a recession, even though growth was likely to slow in the short term.

A US housing slump, led by rising mortgage defaults among 'subprime' or high-risk customers, has triggered a credit crunch that has wreaked havoc on world markets in recent months.

In Asia on Monday, the South Korea stock market slumped by more than three per cent, while Australia and Singapore fell over two per cent.

The Indian stock market dropped nearly 5.0 per cent, with shares in the near three-billion-dollar (S$4.25 billion) listing by Reliance Power - India's biggest initial public offering - tumbling some 17.2 per cent on their trading debut on Monday.

The Dow Jones index in the United States fell nearly 4.5 per cent last week, despite deep cuts in US borrowing costs and a 150-billion-dollar stimulus package rushed through by American lawmakers.

World stockmarkets lost 5.2 trillion dollars in January owing to the fallout from the US subprime crisis and fears of a global economic slowdown, Standard & Poor's said in a report published on Saturday. -- AFP

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