Changes dateline to London, updates throughout

By Naomi Rovnick

LONDON, March 24 (Reuters) -Global stocks were pressured on Friday and safe-haven buying supported government bonds as concerns about the stability of the banking system lingered.

The MSCI World share index .MIWD00000PUS traded 0.4% lower, while still heading for a 1.5% weekly gain. Europe's STOXX 600 index .STOXX was down 1%.

The STOXX sub-index of bank shares .SX7E, which had rebounded fromearlier falls this week following a forced weekend tie-up between Credit Suisse CSGN.S and UBS UBSG.S bought some stability, fell almost 3% in early trade.

Shares in Deutsche Bank tumbled 8% after a sharp jump in its credit default swaps, which reflect the cost of insuring debt against the risk of default, the day before.

The moves highlight just how frail sentiment remains after turmoil in the U.S. and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.

U.S. Treasury sector Janet Yellen has this week tried to assuage investor fears about the health of U.S. lenders and the economic ramifications of a potential lending crunch if depositors flee smaller banks, which have outsized roles in supporting key sectors such as commercial real estate.

U.S. regional banks Silicon Valley Bank SIVB.O and Signature Bank SBNY.O failed this month and shares in beleaguered First Republic Bank FRC.N have lost most of their value.

On Thursday, Yellen said she was prepared to take further action to safeguard bank deposits, after saying a day earlier that blanket insurance was not on the agenda. Banks borrowed $110.2 billion at the Federal Reserve's discount window in the latest week, with the hefty drawdown of emergency credit suggesting some lenders were now unable to secure funds elsewhere.

The Federal Reserve raised its main interest rate by a quarter point to a range of 4.5%-4.75% on Wednesday, but signalled it would consider a pause in light of banking system stresses.

Markets, however, are betting on a U.S. recession and incoming rate cuts.

"You could have a period were you see a precipitous drop in the (availability of) credit in the U.S.," said Arun Sai, senior multi-asset strategist at Pictet Asset Management.

"Small banks are important to the real economy," he added. "This takes us closer to a hard landing, to a U.S. recession."

Spot gold XAU=, which tends to do well during periods of economic uncertainty, was down 0.4% at $1,985 an ounce.

In government bond markets, the yield on the two-year U.S. Treasury US2YT=RR, which tracks interest rate expectations, fell 8 basis points (bps) on Friday to 3.71%.

Ten-year yields US10YT=RR fell 6bps to 3.34%, after edging 9 basis points lower in the previous session.

Traders have also priced in U.S. rate cuts of about 90 bps basis points to about 3.9% by the end of the year FEDWATCH.

Euro zone government bond yields followed Treasury yields lower, with the 2-year German yields DE2YT=RR dropping 16 bps to 2.34%.

In currencies, bets on U.S. rate cuts put the dollar =USD on course for a 1% weekly loss against major peers, although it inched 0.2% higher on Friday.

The yen climbed 0.5% to a six-week high at 130.17 per dollar JPY=EBS, extending its weekly gain to a solid 1.3%. The euro EUR=EBS fell 0.5% to $1.0785.

Brent crude LCOc1, the global oil benchmark, fell 1.5% to $74.79 per barrel.

Reporting by Naomi Rovnick; Additional reporting by Stella Qiu; Editing by Dhara Ranasinghe and Angus MacSwan

To read Reuters Markets and Finance news, click on https://www.reuters.com/finance/markets For the state of play of Asian stock markets please click on: 0#.INDEXA