LONDON (Reuters):

Reassuring words from the Federal Reserve about the United States (U.S.) economy put global worries about a credit crunch on the backburner yesterday, driving money into stocks and emerging market debt from safer havens.

Wall Street looked set for an upbeat start, adding to gains the previous session, while the Japanese yen fell as investors returned to popular currency borrowing trades.

The Fed, after leaving interest rates unchanged at 5.25 per cent on Tuesday, warned that downside risks to growth were increasing and that credit conditions had become tighter.

But it also soothed immediate fears among investors about the state of things to come.

"The economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy," it said.

The tone was enough to bring jittery players back into riskier assets. MSCI's main world index was up 0.7 per cent and its riskier, emerging market counterpart gained more than 2 per cent.

Sovereign debt narrowed

Spreads on emerging market sovereign debt narrowed to below 200 basis points over U.S. Treasuries for the first time since July 26, when its rise signalled widespread investor flight from risk.

"Very neatly, the Fed took a step towards neutrality in terms of the risks, but did not quite go all the way to the centre," HSBC said in a note.

"Overall, this is a pretty clever, market-savvy, statement. It achieves the required balance of acknowledging that some things have changed, but that some other things have not."

Investors have been rattled over the past month by troubles in the U.S. subprime, or risky, mortgage sector, fearing a spill over into other lending that would dry up global liquidity.

The MSCI world index, for example, remains more than 5 per cent from a record high hit some 2-1/2 weeks ago.