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Asian markets briefly recouped many earlier losses and European stocks opened higher. That rally proved short-lived, as investors worried about the consequences of the US credit downgrade, Europe's debt crisis and mounting expectations of a global recession.
Many investors are looking for relatively safer assets to park their cash and the price of gold and the Swiss franc continued to rise to record levels.
"Many global equity markets have now entered bear market territory having fallen by over 20 percent from their recent peaks," said Lee Hardman, an analyst at The Bank of Tokyo-Mitsubishi UFJ.
By mid-morning London time, Germany's DAX was down 5.6% at 5 593 while the CAC-40 in France was 3.5% lower at 3 015. The FTSE 100 index of leading British shares was down 4.1% at 4 858.
Europe's declines followed big falls in Asia earlier. The retreat was led by Hong Kong's Hang Seng, which tumbled 5.7% to 19 331. Other markets fell too, including Japan's Nikkei 225 stock average, which ended 1.7% lower at 8 944, having earlier traded 4% down.
US stocks were also poised for further falls at the open, a day after the Dow Jones industrial average fell a dizzying 634 points. Dow futures were down another 54 points at 10 674 while the broader Standard & Poor's 500 futures fell 3.1 points at 1 108.
Further easing
"It's still very hard to predict how the US market will do," said Jackson Wong, vice president of Tanrich Securities in Hong Kong. "When the dust settles, if the situation doesn't get worse in the US or Europe, the situation will rebound. But the US has to stabilize."
All eyes will be on the US Federal Reserve later when it holds its regular monetary policy meeting and in particular whether the central bank announces measures to stabilise markets and get the US economy going again.
"The odds now favour some form of further policy easing at tonight's meeting," said Kit Juckes, an analyst at Societe Generale.
Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. Intensifying concerns were reports showing that the manufacturing and services industries barely grew in July, although job growth was better than economists expected last month.
Investors are also worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.
The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries.
The European Central Bank stepped in Monday and bought billions of euros worth of their bonds. The move helped to lower yields on Spanish and Italian bonds. They have fallen a tad more Tuesday. The yield on Spain's ten-year bonds has dropped 0.19 percentage point to 4.96% while the Italian equivalent declined 0.17 percentage point to 5.06%.
In the oil markets, worries over the state of the global economy continued to weigh on prices. The main benchmark rate was down $2.06 at $79.25 a barrel. Earlier it had fallen to $75.71, its lowest since September 2010.
