* Global stock markets see biggest weekly drop since 2012
* Crude oil on longest weekly losing streak in 29 years
* U.S. dollar extends losses as Fed rate rise doubts grow
* China factory activity at almost 6-1/2-year low (Adds close of U.S. markets)
By Herbert Lash
NEW YORK, Aug 21 (Reuters) - World stock markets tumbled on Friday and U.S. oil prices dove briefly below $40 a barrel sparked by fresh evidence of slowing growth in China, sending investors scurrying to the safety of bonds and gold.
Stocks on Wall Street and in Europe fell more than 3 percent in a global rout spurred by a more than 4 percent fall in Shanghai stocks .SSEC .
Thomas Lee, managing partner at Fundstrat Global Advisors in New York, said it was hard to say what was behind the sell-off in stocks but a market bottom may be close at hand.
"There's no shortage of things people can cite, from the movement in currencies, to the weakness in commodities and fears about China," Lee said. "But at the end of the day if people are trying to take down risk, then it's going to make sense for them to sell their exposure in equities as well."
Crude posted its longest weekly losing streak in nearly 30 years and emerging market stocks, bonds and currencies all fell, with slowing Chinese growth withering demand for commodities from developing countries.
China's manufacturing sector shrank at its fastest rate in more than six years in August, according to a survey from private data vendor Caixin/Markit.
World markets had already been on edge after China's surprise devaluation of the yuan CNY= last week and a more than 30 percent fall in its stock markets since mid-year.
The U.S. dollar fell too, dropping to a two-month low against the euro, as the Chinese data and falling commodity prices eroded expectations the Federal Reserve will raise U.S. interest rates next month.
"The Fed is in an extremely awkward situation right now," Robbert van Batenburg, director of flow strategy at Societe Generale (PARIS:SOGN). "You have across-the-board competitive currency devaluations that will invoke the deflationary monster here in the U.S."
The Dow industrials, Nasdaq 100 .NDA and major European stock indices have now fallen more than 10 percent from their peak earlier this year.
The pan-regional FTSEurofirst .FTEU3 fell 3.4 percent to 1,427.13, its worst day since November 2011, as traders shrugged off upbeat euro zone manufacturing and services data in a third straight day of selling.
MSCI's emerging markets index .MSCIEF was at its weakest in four years, off 2.16 percent, while the firm's all-country world stock index .MIWD00000PUS fell 2.7 percent.
The Dow Jones industrial average .DJI fell 530.94 points, or 3.12 percent, to 16,459.75. The S&P 500 .SPX slid 64.84 points, or 3.19 percent, to 1,970.89 and the Nasdaq Composite .IXIC lost 171.45 points, or 3.52 percent, to 4,706.04.
A U.S. recession is not in sight, and with stock valuations such as price to earnings, to book and to sales at or close to 25-year averages, the sell-off may be overdone, said David Kelly, chief market strategist at JPMorgan (NYSE:JPM) Asset Management.
"If you're fully invested, just enjoy the rest of the summer," Kelly said. "If you're sitting on cash waiting for a buying opportunity, well guess what, this is the buying opportunity."
OIL AND EMERGING MARKETS HIT
Crude oil fell again as oversupply from members of the Organization of the Petroleum Exporting Countries in particular continues to overwhelm slowing demand.
U.S. crude CLc1 was at a more than six-year low as it posted an eighth straight weekly decline. The U.S. benchmark traded briefly below $40 a barrel before settling down 87 cents at $40.45. Brent LCOc1 fell $1.16 to settle at $45.46.
Oil's run of weekly losses is its worst since 1986.
Emerging market currencies in the Americas tracked Asian markets lower, with the Colombian and Mexican pesos as well as Brazil's real falling more than 1.0 percent against the dollar.
Earlier in Asia, the Malaysian ringgit hit a pre-peg 17-year low and South Korea's won took its losses to 1.8 percent against the dollar this week.
Gold, seen as a good asset in difficult times, rose to its highest in more than a month. U.S. gold futures for December delivery settled up 0.6 percent at $1,159.60 an ounce.
Yields on safe-haven U.S. Treasuries slipped further, with the benchmark 10-year note US10YT=RR rising 10/32 in price, pushing its yield down to 2.0487 percent.
Lower Treasury yields and the stronger euro weighed on the dollar. The greenback traded down 1.01 percent at 122.14 yen JPY= and against the euro EUR= , the dollar fell 1.17 percent to $1.1373.