(Reuters) - A grim economic outlook from the U.S. Federal Reserve and signs of slowing growth in China and Germany drove world stocks down more than 4 percent on Thursday, prodding investors into the safe-haven U.S. dollar and government bonds.

The U.S. dollar climbed to a seven-month high against a basket of major currencies as investors dumped riskier trades in favor of the world's most liquid currency.

The sharp rally in the dollar pushed down U.S. crude oil prices by more than 5 percent, while gold fell nearly $50 an ounce in a broad retreat in the commodities sector.

U.S. stocks were sharply lower in early trading and European shares fell more than 4 percent to a two-year low, dragging an index of global equities to a one-year trough.

"Hidden behind the Greek drama over the past few weeks and unveiled again yesterday with the (Fed) statement and action, the unfolding global economic slowdown is back to front and center," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.

The Dow Jones industrial average was down 348.59 points, or 3.13 percent, at 10,776.25. The Standard & Poor's 500 Index dropped 35.55 points, or 3.05 percent, at 1,131.21. The Nasdaq Composite Index slid 75.81 points, or 2.99 percent, at 2,462.38.

World stocks as measured by the MSCI index were down 4.4 percent. The more volatile emerging markets stock index slid 6.2 percent.

In Europe, the FTSEurofirst 300 fell 4.4 percent. Britain's FTSE 100 lost 4.8 percent, and Japan's Nikkei closed down 2.1 percent.

The Federal Reserve warned Wednesday of significant risks to the already weak U.S. economy as it launched a plan, dubbed Operation Twist, to lower long-term borrowing costs and bolster the battered housing market.

"It seems the market doesn't believe Operation Twist is enough to kick-start the spluttering economy," said Ben Potter, market strategist at IG Markets. "A very downbeat outlook ... seems to have unsettled markets even further."

Adding to the gloom about the global economy, China's manufacturing sector contracted for a third consecutive month in September, while business activity in Germany grew at its weakest pace in more than two years in September and new orders fell for a third month.

SAFETY FIRST

Benchmark 10-year notes rose a point, their yields falling to 1.76 percent from 1.87 percent late Wednesday.

The dollar climbed to a seven-month high against major currencies. It was last up 1.6 percent at 78.556.

"The dollar's strength and the risk aversion that we have seen in recent weeks have picked up steam," said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase.

The euro fell to an eight-month low of $1.3384, its lowest since January, and was last down 0.9 percent at $1.3443.

Spot gold last traded down at about $1,734.

U.S. crude futures were down $4.07 at $81.80 a barrel, while Brent futures were $3.64 lower at $106.74 a barrel.

(Additional reporting by Jeremy Gaunt in London; editing by Jeffrey Benkoe)

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