By Mary Milliken

NEW YORK (Reuters) – The global economic slowdown trumped even the biggest OPEC output cut ever on Wednesday as the measure aimed at boosting oil prices instead deepened the gloom over slumping world demand, sparking a sharp drop to a four-year low.

Euphoria the day before from the U.S. Federal Reserve’s dramatic rate cut to near zero wore off even as several other countries from Europe to Asia followed suit by cutting rates. Investors were left wondering what tools were left in the arsenal to tackle the year-long recession.

But the moribund U.S. mortgage industry at the root of the downturn did see some relief. The long-term mortgage rate fell a quarter point to around 5 percent and the week’s average could be the lowest in 46 years — which could stoke a revival of demand in the housing market.

U.S. stocks closed 1 percent lower on Wednesday after gaining 5 percent on Tuesday. Wall Street giant Morgan Stanley gave the market a scare by posting larger-than-expected losses.

Adding to the sense of financial mayhem was more fallout from the alleged $50 billion (32 billion pounds) fraud by U.S. financier Bernard Madoff. As he was put under house arrest, another European bank, BNP Paribas, posted losses connected to the scandal, sending European stocks lower.

The Dutch pension fund of Royal Dutch Shell Plc said it had $45 million exposure and in Asia, Great Eastern Holdings Ltd, the insurance arm of Singapore’s Oversea-Chinese Banking Corp, said it had an indirect exposure of about the same amount.

DRIVING OIL PRICES

The sharp drop in oil prices was a sobering reminder that investors are bracing for long, deep worldwide recession.

OPEC announced a larger-than-expected supply cut of 2.2 million barrels a day to counter slumping world demand for oil. But instead of supporting prices, it sparked a sell-off to a four-year low nearing $40 a barrel.

“The world economy is driving the price more than anything OPEC can do at this stage,” said Gary Ross, CEO of consultancy PIRA Energy. “It will be hard for the cuts to have any traction with regard to price in a deteriorating economic environment.”

The price of oil has dropped more than $100 a barrel from a high of $147 in July.

Central banks across the globe are slashing rates and eying unorthodox policy measures as the worst financial crisis in 80 years propels many countries into recession.

The day started off with rounds of rate cuts from Hong Kong to Norway after the Fed’s surprise move to cut the benchmark rate to a range of zero to 0.25 percent from 1 percent. And analysts said the Fed decision could push the Bank of Japan to cut rates from 0.3 percent on Friday.

“It’s likely to cut rates, even to zero,” said Hirokata Kusaba, senior economist at Mizuho Research Institute.

Although the Fed said it would use “all available tools” to revive the economy after virtually exhausting room for more cuts, the markets quickly soured amid the uncertainty of what that meant.

“Everyone originally was very enthused yesterday because the Fed made it known they were going to stand and do anything that is necessary, no matter what, to get this economy back on track,” said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey.

“This morning we awaken with a hangover and the realization of how many bullets do they have left?” he said.

UNEMPLOYMENT WORRIES

The damage from the financial crisis was visible in economic data and company reports.

The number of Britons out of work and claiming benefit rose to over 1 million for the first time since 2001, while British retail sales fell at their fastest annual pace in at least a quarter of a century in December.

That data raised the chance of hefty Bank of England rate cuts next month, analysts said.

In China, a commentary in the Communist Party mouthpiece said the Asian giant faced a tough task maintaining social stability in the face of rising unemployment.

Honda shares were down 4 percent after Japan’s No. 2 automaker issued its third profit warning this year, citing big currency losses and tanking sales.

In the United States, General Motors and Chrysler await word from Washington on billions of dollars in emergency loans they say they need to avert collapse.

The dollar tumbled against major currencies, hitting its weakest level in more than 13 years versus the yen and a 2-1/2-month low against the euro.

Long-dated U.S. Treasury debt prices jumped as investors scrambled for any returns in the safe-haven investment, sending the yield on the 10-year bond briefly down to its lowest intraday level in 50 years, 2.08 percent.

Wall Street woke to a wider-than-expected quarterly loss of $2.2 billion at Morgan Stanley as the credit crisis generated more writedowns and slashed fees from investment banking and brokerage. Its shares initially fell 6 percent but closed 2.3 percent higher.

(Writing by Mary Milliken; Reporting by Reuters bureaus worldwide, Editing by Brian Moss, Gary Hill)