By Hilary Russ

NEW YORK (Reuters) - Global markets sold off for a second straight day on Monday, dragging the British pound to a 31-year low, while gold and safe-haven government debt rallied on Britain's shock vote last week to leave the European Union.

Major U.S. stock indexes recorded their worst two-day drop in about 10 months. Banking stocks led losses amid uncertainty over London's future as the region's financial capital.

On Wall Street, the S&P financial index <.SPSY> fell nearly 2.79 percent. Declines for JPMorgan <JPM.N> and Bank of America <BAC.N> grew as the day wore on, with the shares down 3.34 percent and 6.31 percent respectively.

An index of European bank shares <.SX7P> fell 7.67 percent. Royal Bank of Scotland <RBS.L> fell 15.1 percent, while Barclays <BARC.L> shed 17.35 percent, with both paring losses slightly through the day.

Bank stocks at a seven-year low helped push London's top share index <.FTSE> down 2.55 percent, shedding nearly 100 billion pounds (US $132 billion) and 5.6 percent over two days.

The Dow Jones industrial average <.DJI> fell 260.51 points, or 1.5 percent, to 17,140.24, the S&P 500 <.SPX> lost 36.87 points, or 1.81 percent, to 2,000.54 and the Nasdaq Composite <.IXIC> dropped 113.54 points, or 2.41 percent, to 4,594.44.

Britain's finance minister, George Osborne, sought to reassure markets, saying the world's fifth-largest economy was strong enough to cope with the Brexit-inspired volatility.

But the positive impact on sterling was only fleeting. Sterling <GBP=> sank to its lowest level against the U.S. dollar since September 1985, down 3.6 percent to $1.310, surpassing Friday's low.

Standard & Poor's Ratings Service stripped Britain of its last remaining triple-A credit rating on Monday, chopping it two notches to 'double-A.' Fitch Ratings also cut the U.K. on Monday one notch to 'AA.'

"Markets already appear to be pricing in a full-blown recession in the U.K. and rising recession risk in the rest of Europe," said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management.

Upcoming elections will test whether Britain's populist, nationalist vote is replicated, he said, with Spain's national election on Sunday having been the first test.

The center-right People's Party won gains, raising hopes of an end to the country's political deadlock and driving down Spanish borrowing costs.

Riskier southern European markets, seen as the most vulnerable in the euro zone to the political and economic fallout of Brexit, drew comfort from Sunday's Spanish election and its swing back to mainstream parties.

MSCI's all-country world stock index <.MIWD00000PUS> fell 2.21 percent.

Yields on government debt fell again. German 10-year bond yields <DE10YT=TWEB>, the benchmark for euro zone borrowing costs, fell as low as minus 0.11 percent but held above Friday's record low of almost minus 0.17 percent.

In the scramble for safe-haven assets, U.S. Treasury yields hovered near four-year lows. The 10-year note <US10YT=RR> fell 12 basis points to 1.455 percent.

The euro <EUR=>, also seen vulnerable to the exit of the EU's second-largest economy, fell 1.2 percent to as low as $1.098. The yen firmed as high as 101.95 per dollar <JPY=>.

The dollar index, which tracks the greenback's value against six currencies <.DXY>, was up 1.1 percent.

The rallying dollar helped drag oil prices down. U.S. crude oil futures settled at $46.33 per barrel, down $1.31 or 2.75 percent. Brent crude <LCOc1> settled down $1.25, or 2.6 percent, at $47.16 a barrel.

(Aditional reporting by Yashaswini Swamynathan in Bengaluru, Richard Leong and Barani Krishnan in New York, Dhara Ranasinghe and Yumna Mohamed in London; Editing by Nick Zieminski and Dan Grebler)