* Fed minutes cool hopes for Sept rate liftoff
* German stocks face worst month since 2012
* Wall St on pace for third straight decline (Adds U.S. market open, changes byline, dateline, previous LONDON)
By Chuck Mikolajczak
NEW YORK, Aug 20 (Reuters) - World stock markets and oil prices fell on Thursday as another slump in the equity market of China, the No. 2 economy, stoked concerns about sluggish global growth.
Wall Street was also weighed down by a drop in finance stocks and was poised for a third day of declines as expectations cooled for a U.S. interest rate hike in September.
Stocks in China tumbled again, with both the Shanghai and Shenzhen markets .SSEC .CSI300 down more than 3 percent. ID:nL3N10V2PQ Investors have been concerned a weak currency and slowing economy may spur further capital outflows.
"This is clearly the indicators that are coming out of China," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"There is tremendous risk in this market right now; in addition, you haven't had a more than 5 percent correction (in U.S. stocks) in years, so we are so overdue for a correction."
Shares in Asia hit a two-year low, German stocks extended losses in what is shaping up to be their worst month in over three years, and British stocks hit their lowest since January.
Financials .SPSY were the worst performing of the 10 major S&P sectors, down 1.5 percent. The drop comes in the wake of minutes released Wednesday from the Federal Reserve's July meeting, which cast doubt that the Fed would start to raise interest rates as early as September, the first such move in nearly a decade.
The Dow Jones industrial average .DJI fell 191.01 points, or 1.1 percent, to 17,157.72, the S&P 500 .SPX lost 21.2 points, or 1.02 percent, to 2,058.41 and the Nasdaq Composite .IXIC dropped 76.44 points, or 1.52 percent, to 4,942.61.
MSCI's all-country world stock index .MIWD00000PUS lost 1 percent after touching a 6-month low.
The Fed minutes showed officials in broad agreement that the U.S. economy was nearing the point where interest rates should move higher. But they also noted that lagging inflation and a weak global economy posed too big a risk to commit to a rate "lift off." ID:nL1N10U1HJ
"In this kind of environment, if this market is going to drop and China is going to drop, how are they going to raise interest rates here?" Mendelsohn said.
BROAD DECLINES
The FTSEuroFirst index of 300 leading European shares fell 1.9 percent .FTEU3 and Germany's DAX fell 2.1 percent .GDAXI to its lowest since January. That put the DAX down about 7.5 percent so far this month, its worst month in three years. ID:nL5N10V2DN
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shed 1.7 percent to a two-year low, marking a fifth consecutive day of losses in what is its longest losing streak this year.
Japan's Nikkei .N225 fell 0.9 percent.
Benchmark 10-year notes US10YT=RR were last up 9/32 in price to yield 2.0976 percent from 2.50 percent in mid-June.
The dollar .DXY shed 0.34 percent to 96.028 against a basket of major currencies amid the diminished rate hike expectations, touching a 1-month low of 95.859.
Commodities and emerging markets were among the hardest-hit by fear of slowing Chinese demand, and were exacerbated by the Fed minutes. ID:nL1N10V0TH
U.S. crude oil CLc1 bounced from a 6-1/2 year low of $40.21 to trade up 0.4 percent at $40.97, while Brent crude was down 0.4 percent at $46.99. ID:nL5N10V2L1
MSCI's emerging market index .MSCIEF set a near four-year low, having fallen 22 percent from this year's high hit in April.
(Editing by Bernadette Baum)