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Fears about the world banking system swept across financial markets on Tuesday, overwhelming any lingering support from the U.S. plan to rescue Fannie Mae and Freddie Mac and battering equities and the dollar.
The U.S. currency closed in on its all-time low against the euro.
Whatever sentiment boost investors managed to take from the U.S. Federal Reserve and Treasury Department plan to lend money and buy equity in mortgage giants Freddie and Fannie Mae was soon dissipated in a sea of worry about other financial institutions.
"Sentiment is really fragile," said Louis Wong, research director with Phillip Securities in Hong Kong. "Investors are worried that there might be more bank failures, especially small banks in the United States."
MSCI's main world stock index was at a 21-month low and on track for an 11th consecutive daily loss. Its emerging market counterpart lost more than 2 percent while Asia stocks fell to a two-year low.
The pan-European FTSEurofirst 300 was down 1.5 percent and Japan's benchmark Nikkei average closed down just shy of 2 percent.
The euro rose above $1.60 to a three-month high versus the U.S. currency, closing in on April's record $1.6018.
The dollar, meanwhile, was weak across the board at a three-month low against a basket of major currencies.
FEAR OF FAILURE
The catalyst for the widespread gloom is a renewed fear that the credit crisis which began shaking the financial system a year ago may not be over, as many had hoped.
On top of the troubles at Fannie and Freddie, two pillars of the U.S. mortgage system, regulators seized the U.S. mortgage lender IndyMac Bancorp Inc late last week following withdrawals by panicked clients.
Many investors initially reacted positively on Monday after the Fed and Treasury indicated they would not let Fannie and Freddie fail, but markets soon began focusing on the reason that such commitments were needed in the first place.
"The conditions are foul and it is possible that the downwards spiral continues if a possible run on banks in the U.S. intensifies," said Stefan de Schutter, an asset manager at Alpha Trading in Frankfurt.
The worries have come on top of other fears for the future, including record high oil prices threatening inflation, slowing growth in the U.S. and European economies, and rising geopolitical concerns revolving around the Middle East.
Crude oil was somewhat lower on the day but still at more than $144.50 a barrel.
Euro zone government bonds were flat. Ten-year Bunds yielded 4.394 percent while the two-year Schatz yield was 4.375 percent. (Reuters)
