Evidence of a deepening economic slump mounted on Tuesday as a top European central banker warned G20 efforts to boost the IMF's firepower could stoke inflation by creating "helicopter money".
Shares fell after a powerful month-long rally ahead of what markets expect to be a weak corporate results season, which U.S. aluminium company Alcoa will kick off after the Wall Street close.
Bank stocks led the losers as high-profile commentators voiced renewed concerns about the health of the banking system and part-nationalised British lender Royal Bank of Scotland said it could shed up to 9,000 jobs over the next two years.
European data was revised down to show the euro zone economy recorded its deepest ever quarterly fall in the last three months of 2008, pointing to a sharp and enduring recession this year.
"The starting point is weaker and highlights that the average growth for 2009 will be very negative — we forecast contraction of 4.3 percent," said Juergen Michels, economist at Citigroup.
Actions by policymakers also suggested any recovery in the global economy remains more a hope than a reality.
In Asia, the Reserve Bank of Australia cut interest rates to a record low 3.0 percent and the Bank of Japan unveiled steps to free up credit by lending against a wider range of municipal bonds.
Ireland, whose small economy has become a poster child for boom-to-bust, will unveil an emergency budget this afternoon, with the government under intense pressure to tame the deficit after three rushed attempts in nine months.
DISCORD
Last week's G20 meeting may have gone down well with markets but ECB executive board member Juergen Stark — known for his strict adherence to inflation targets and promotion of disciplined budgets — struck a discordant note by criticising the moves by the developing world's political heavyweights to boost the IMF's Special Drawing Rights (SDRs).
"That is pure money creation. That is helicopter money for the globe," he told German business daily Handelsblatt in comments later confirmed by the ECB.
"Helicopter money" describes the process of pumping cash into an economy as an extreme response to the threat of deflation.
Grim data showing gross domestic product in the 15 countries using the euro fell 1.6 percent in the fourth quarter coincided with a 12th straight month of decline British manufacturing output in February and a record 50 percent fall in March steel output in Germany, Europe's biggest exporter.
The euro zone data had previously pointed to a 1.5 percent GDP contraction.
The euro fell against the dollar on fears the economic downturn this year will be even worse than previously expected.
"It seems that the first quarter will be absolutely catastrophic — if you look at the components of GDP in the fourth quarter there is no positive impetus," said Joerg Angele, economist at Bayerische Landesbank.
Sporadic signs of thawing credit markets emerged from South Korea, which announced it had picked the financial institutions to manage its first global sovereign bond offering in three years.
WARNING SIGNS
Yet while many investors look for evidence that the worst of the crisis may have passed, warning signs are still flashing.
Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund are set to suggest, British daily the Times reported.
Veteran analyst Mike Mayo of Calyon Securities predicted the banking sector's problems had further to run and billionaire investor George Soros told Reuters Financial Television on Monday the whole banking system "is basically insolvent".
Investors will learn more about the toll on corporate profits in the comings weeks. According to data from Thomson Reuters, first quarter earnings for S&P 500 companies are expected to fall by almost 37 percent versus a year ago as global demand slumps.
