* Caution reigns after disappointing China inflation reading
* Oil prices hit fresh lows on demand fears
* Dollar slumps as investors reassess Fed rate outlook (Updates prices; changes comments)
By Rodrigo Campos
NEW YORK, Oct 15 (Reuters) - Stocks suffered their biggest losses in years and the dollar slumped on Wednesday after the latest inflation data from the United States and China fanned worries about a global slowdown, driving investors into safe-haven government debt.
The S&P 500 fell nearly 3 percent, putting it on track for its worst day in nearly three years, while European equities finished 3.2 percent lower and marked their biggest one-day slide in almost four years.
The selloff wiped out all of the year's gains in major U.S. and European indexes, and a key gauge of Wall Street anxiety hit a three-year high as investors rushed to protect against further losses in markets.
Popular trades that have worked for most of the year, including heavy bets on the dollar, more gains in stocks, and on an eventual rise in yields, are unraveling.
"Right now, the risk play is off the table until stability re-enters, whether it's through better economic data, better grip and understanding of the Ebola concerns," said Andre Bakhos, managing director at Janlyn Capital LLC in Bernardsville, New Jersey.
"There wasn't a single trigger," he said . "We've been in a downtrend recently and it's been a continuation of the recent trend change to the negative."
A fall in China's inflation rate to a five-year low and a decline in U.S. producer prices for the first time in over a year were worrisome signs to investors already skittish about the path of the global economy and caused them to reassess their views on when the U.S. Federal Reserve might hike interest rates.
The latest news on the spread of Ebola added to a climate of fear, with another Texas healthcare worker testing positive for the deadly virus, Texas officials said Wednesday. Almost 4,500 people have died of the disease, mostly in West Africa.
An MSCI gauge of stocks in major markets was down 2.2 percent, its largest daily decline since June 2013. The CBOE Volatility Index rose to 29.54, after earlier hitting 31.06, the highest level since May 2011. Trading volume in the options market was projected to be its busiest on the year, according to Trade Alert data.
The Dow Jones industrial average fell 456.89 points, or 2.8 percent, to 15,858.3, the S&P 500 lost 57.04 points, or 3.04 percent, to 1,820.66, and the Nasdaq Composite dropped 109.60 points, or 2.59 percent, to 4,117.57.
Worries about Ebola slammed airline stocks. The U.S. Centers for Disease Control and Prevention said the second nurse who was diagnosed with the virus had been on a plane the day prior.
Flight from risk resulted in a massive rally in U.S. Treasuries, pushing the 10-year note's yield as low as 1.865 percent, its lowest level since May 2013. Rate futures now show the market does not expect the Fed to raise rates until early 2016, a dramatic change from a few weeks ago.
The U.S. benchmark yield ticked above 2 percent in afternoon trading and 10-year Bund yields hit a record low of 0.719 percent before edging up to 0.757 percent.
"Everyone's animal spirit is dead. This is a pretty dramatic move when everyone was expecting higher rates," said George Goncalves, head of U.S. interest rates strategy at Nomura Securities International in New York. "It's all about capital preservation at this point. All the crowded trades are being tested, which is why I'm not sure this is over."
The spread of high-yield corporate bond spreads over the benchmark U.S. Treasuries, which represents the premium paid to investors to compensate for the risky corporate debt, rose to match the high hit in September 2013, at 483 basis points. The spread had bottomed at 335 bps in June.
A repricing of Fed expectations fueled a selloff in the dollar, which has been rising recently on bets on policy tightening at the Fed while other central banks continue easing.
"Some of the concerns about Europe and the other economies slowing down has reached our shores today with the retail sales number and the PPI number," said Scott Armiger, portfolio manager at Christiana Trust in Greenville, Delaware.
Although U.S. September retail sales had been expected to decline, the weakness was surprising because it was broadbased.
The euro was last up 0.8 percent against the dollar at $1.2754, just below a three-week high of $1.2885 hit earlier. The greenback lost 0.7 percent against the yen at 106.27.
Spot gold prices rose 1.1 percent, up for the sixth time in the last eight sessions with the help of the weaker dollar, but copper prices tumbled 2.5 percent.
Brent and U.S. crude futures fell, a day after posting their biggest daily drop in years, with more production, less demand and deflation expectations weighing heavily.
Brent lost 0.8 percent to $84.35 a barrel while U.S. crude fell 0.7 percent to $81.26.
Emerging markets were also hit with a fall in Russia's rouble to its weakest level on record, while Russian government 10-year yields hovered near a five-year high and shares in Moscow closed near a seven-month low hit last week. (Additional reporting by Chuck Mikolajczak, Sam Forgione, Michael Connor, Richard Leong, Daniel Bases and Yasmeen Abutaleb; Editing by David Gaffen, David Gregorio and Leslie Adler)