RPT-GLOBAL MARKETS-Fannie, Freddie bailout spurs hunger for risk

* Stocks up, govt bonds down on US rescue of mortgage giants

* Yen suffers as risks reduced by prop to US housing market

* Global financial crisis still wears on, analysts say (Repeats to additional subscribers with no change to text) (Updates prices, adds European outlook)

By Kevin Plumberg

HONG KONG, Sept 8 (Reuters) - Asian stocks surged 4 percent on Monday after Washington took over Fannie Mae and Freddie Mac to salvage the U.S. housing market, spurring investors to buy back risky assets and sell safe havens such as government bonds.

European stock markets were expected to open sharply higher, with financial bookmakers expecting Britain's FTSE 100 .FTSE up 3.4 percent, Germany's DAX .GDAXI up 2.9 percent and France's CAC .FCHI up 4.3 percent.

Fund managers, who have been keeping their portfolios heavy with cash, devoured bank shares and ploughed into Asia-Pacific currencies other than yen after what could be the biggest U.S. government bailout ever eased some fears in credit markets.

Still, the potential heavy borrowing the U.S. government may need to fund the rescue package could ultimately hurt the U.S. dollar, some analysts said, a prospect that also sent Treasury bond yields higher.

"You do take some of default risk out of the market, so in that sense this is good for other financial assets. You have reduced systemic default risk," said Paul Schulte, regional strategist with Lehman Brothers in Hong Kong.

"Longer-term we have a lot more glass to crawl over because we have arrangements with other financial institutions that need to get worked out," he said.

Japan's Nikkei share average .N225 rose 3.4 percent, bouncing from a 5-1/2-month low on Friday.

Stocks of large banks such as Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz) and Mizuho Financial Group (8411.T: Quote, Profile, Research, Stock Buzz) rallied 13.3 percent and 12.1 percent, respectively. [ID:nSP306679]

The MSCI index of Asia-Pacific stocks traded outside of Japan .MIAPJ0000PUS was up 4.8 percent, rebounding from the lowest since October 2006. It was on track for the biggest daily gain since January 2008.

Hong Kong's Hang Seng index .HSI was up 3.9 percent, led by shares of Europe's largest lender HSBC Holdings (0005.HK: Quote, Profile, Research, Stock Buzz).

Government bond prices have become increasingly more expensive relative to Asian equities because investors have been reluctant to buy into local markets with inflation and a global slowdown combining to darken the outlook.

For example, the earnings yield on the S&P Asia 50 index minus the yield on the 10-year U.S. Treasury note -- a gauge of Asian stocks' value relative to risk-free bonds -- is at the highest since October 2005.  Continued...