NEW YORK (Reuters) - Stock markets fell worldwide on Thursday on fears over the health of the global economy and the banking sector, with MSCI’s global stock index dropping to more than 20 percent below its all-time high, while safe-haven 10-year Treasury yields hit their lowest since 2012.

Doubts about central banks' ability to avoid deflation and stimulate economic growth have now pushed the U.S. benchmark S&P 500 .SPX index down 10.5 percent for the year. The FTSEurofirst 300 .FTEU3 index of top European shares sank to its lowest level in 2-1/2 years.

Yields on benchmark 10-year U.S. Treasury notes hit 1.53 percent, their lowest level since August 2012, on the worries over global growth and the effectiveness of central bank policy.

The U.S. dollar hit its lowest against the yen since October 2014, at 110.985 yen, and was on track for its worst week against the Japanese currency since 2008.

“There are mounting concerns about the ability of central banks to continue to prop up asset prices,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. “That’s part of why we’re seeing assets across the board come under pressure.”

European bank stocks ended 6.3 percent lower, making them the worst-performing sector and widening their losses for the year to more than 28 percent. Shares of Societe Generale SOGN.PA, France's second-biggest bank, closed down 12.6 percent after disappointing profit results.

The S&P financial stock index .SPSY ended down about 3.0 also on concern that low economic growth and negative interest rates in some countries is undermining bank profitability.

MSCI’s all-country world equity index, which tracks shares in 45 nations, was last down 4.73 points, or 1.32 percent, at 353.35. The index hit its lowest level in more than 2-1/2 years and closed down more than 20 percent from an all-time high.

Slideshow ( 3 images )

YELLEN SAYS FED POLICY NOT PRE-SET

The slump in stocks and bond yields declines came even as Federal Reserve Chair Janet Yellen sought to reassure investors in congressional testimony that the Fed will remain flexible in its approach. The markets, however, do not expect the Fed to raise rates further this year, compared with Fed forecasts that still point to more tightening.

“Credit has been signaling these concerns, and to some extent other markets, and particularly equity, have caught up with what credit had been telling them, which was: We’re really worried about global growth, we’re really worried that central banks are running out of ammunition,” said David Riley, head of credit strategy at BlueBay Asset Management in London.

Slideshow ( 3 images )

The Dow Jones industrial average .DJI ended down 254.56 points, or 1.6 percent, at 15,660.18. The S&P 500 .SPX lost 22.78 points, or 1.23 percent, at 1,829.08. The Nasdaq Composite .IXIC dropped down 16.76 points, or 0.39 percent, to 4,266.84.

Europe's broad FTSEurofirst 300 index .FTEU3 closed down 3.68 percent at 1,195.76.

The 10-year U.S. Treasury note yield dropped to 1.53 percent, its lowest since September 2012, while the 30-year bond yield hit 2.38 percent, its lowest in a year.

The yield spread between 10-year and 2-year notes narrowed to its tightest since November 2007, reflecting an outlook for weak economic growth and low inflation.

U.S. crude prices fell, hitting a 12-year low of $26.05 a barrel as domestic stocks grew and Goldman Sachs called for depressed prices until the second half of the year.

Brent crude settled down 78 cents, or 2.53 percent, at $30.06 a barrel.

Safe-haven spot gold surged 5.3 percent to $1,260.60, the highest in a year. U.S. gold futures for April delivery settled up 4.5 percent at $1,247.80 per ounce.