Emerging debt-Yields spreads wider, stocks drop on gloomy U.S.

*EMBI+ index softer, yield spreads widen, stocks drop

*Ecuador sells off sharply on nationalizations, oil falls

By Daniel Bases and Manuela Badawy

NEW YORK, July 15 (Reuters) - Investors trimmed their emerging market credit holdings on Tuesday while equities fell more sharply after U.S. Federal Reserve Chairman Ben Bernanke gave a starkly gloomy assessment for U.S. economic growth.

Emerging market assets were sold amid general risk aversion, with a decline in U.S. stocks and a rally in U.S. Treasuries as investors bought on expectations that threats to growth outweigh inflation pressures.

In such a scenario the Fed is unlikely to tighten monetary policy, given that consumers are finding it hard to borrow money for house purchases and banks are finding it difficult to shore up balance sheets against credit losses.

Bernanke, in his semi-annual testimony on economic conditions to lawmakers on Tuesday, acknowledged that financial markets had grown increasingly anxious in recent weeks, particularly over the financial condition of mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz).

He stressed that the outlook for economic growth and inflation was unusually uncertain.

"You can have overall slowing in the U.S. which would ultimately affect overall risk appetite and then ultimately commodity prices. Because of that you may have lower capital inflows into emerging markets," said Doug Smith, chief economist for the Americas at Standard Chartered Bank in New York.

"There was enormous demand for U.S. Treasuries this morning and therefore that is pricing out (U.S.) rate hikes. All markets in general seem to be focusing more on the risks to growth rather than simply inflation. The move into Treasuries sucked money out of equities and emerging markets," he said.

Morgan Stanley Capital International's emerging markets stock index .MSCIEF fell 2.55 percent to 1,016.41 in mid-afternoon New York trade, just above an earlier decline that marked its lowest level since late August 2007.

In the sovereign debt markets the yield spread on the benchmark JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS widened by 5 basis points to 312 basis points over stronger Treasuries. Total returns fell 0.29 percent on the day.

Ecuador was the biggest loser on the EMBI+ with total returns down 3.26 percent. Investors continued to sell the credits after the government earlier this month took over two television networks and nearly 200 businesses with threats to seize more companies, prompting the finance minister to resign.

A sharp drop in oil prices, which is Ecuador's main source of income, also contributed to investor flight.

Oil prices suffered their largest price fall in 17 years on Tuesday, on profit-taking partly sparked by a sharp slide in stock prices.

A drop of $9.26 from Monday's settlement price was the biggest decline in dollar terms for crude since Jan. 17, 1991, when prices fell $10.56 on the day, after the United States began bombing Iraq in the first Gulf War, according to New York Mercantile Exchange data.

Ecuador's global bond due in 2015 <ECUGLB15=RR> fell 2.250 percent to bid 95.500 in price and to yield 10.253 percent.

So far this month Ecuador bonds have shed 4.1 percent of their total returns, which compound to 1.87 percent year-to-date according to JPMorgan.

On the EMBI+ Ecuador's yield spreads, an important gauge of investors' aversion to risk, widened 30 basis points to 708 basis points, the widest level since mid-March.

Credit default swap spreads for Latin American bonds widened slightly.

"It is all (U.S.) stocks. That is what is driving this market primarily. The high-betas like Ecuador and Argentina are reacting more, but the rest of the market is down for sure but not too dramatically," said one senior trader at a German bank in New York.

Latin American stock markets fell on the back of weak U.S. market performance, with the Mexican stock market IPC .MXX down 0.69 percent, the Brazilian Bovespa .BVSP dropping 0.52 percent, the Argentine Merval index falling 2.420 percent and the Chilean stock market .IPSA shedding 1.36 percent. (Editing by Leslie Adler)