Asian stocks tumbled, putting them on course for the biggest monthly decline in more than a decade, and the yen hit a 4-month high on Tuesday after US lawmakers rejected a $700 billion plan to end financial panic and stave off recession.
Fear gripped markets as investors dumped emerging market assets, sought stability in government debt and confronted the prospect that the crisis of confidence in the bank industry will persist, further damaging the global economy.
Credit markets were locked up as banks hoarded US dollar funds while the costs of protection against defaulting on borrowings and restructuring soared.
The overnight failure of Washington's biggest and most comprehensive bid to keep financial sector shockwaves from tearing up the real economy knocked down the US S&P 500 stocks index for its biggest decline since October 1987.
"In the US, we should expect a longer, deeper recession, further consolidation of the banking sector, and further steps by the authorities to help the situation," said Gerard Lyons, chief economist and group head of global research with Standard Chartered in London.
"The more the US and the more China slows, the more Asia will be hit and the greater the fall in commodity markets, with all regions including Africa and the Middle East slowing," he said in a note.
Japan's Nikkei share average tumbled 4.6 per cent to a three-year low, and the MSCI index of Asia-Pacific stocks outside Japan fell 4 per cent, not far off a 26-month low.
The index is down 18 per cent in September, the largest decline since October 1997 in the midst of the Asian financial crisis.
This month has been laced with explosive events that have turned Wall Street upside down and threatened the global financial system, including the bankruptcy of Lehman Brothers, the rescue of American International Group and the demise of the US investment banking model.
Hong Kong's Hang Seng index was down 3.3 per cent, led by shares of HSBC and Industrial and Commercial Bank of China, two of the biggest banks in the world.
Global equities have had a high inverse correlation with the Chicago Board Options Exchange Volatility index, also known as the VIX The last 24 hours have been no exception.
The VIX -- Wall Street's fear gauge -- closed at a record high overnight, reflecting immense needs to hedge positions in US equities.
YEN STILL IN FAVOUR
Investors around the world have been scrambling to eliminate any risk in their portfolios, loading up on traditional safe harbours like short-term US government debt and gold.
Gold prices in the spot market were largely unchanged at $902.10 an ounce after rising 5 per cent to touch a two-month high overnight of $920 an ounce.
"The gold market is telling us that the world economy is in peril," said Jeffrey Nichols, managing director of American Precious Metals Advisors.
Yields on Treasury debt with maturities below 1-year slipped, with the 1-month bill yield at 0.06 per cent. The 3-month bill yield was at 0.7 per cent
Another asset that has gained favour during times of widespread uncertainty is the yen.
Though central banks outside the United States have had to set up special currency swap programs to meet high demand for U.S. dollar funding, investors have been turning to the yen as a haven.
"For currencies, the only trade in town with any staying power is risk aversion and the yen remains the favored pick," said Alan Ruskin, chief international strategist with RBS Greenwich Capital, in a note.
"I think the yen positive story remains clear-cut against all the major Europeans, and particularly the emerging world."
The dollar dropped to a 4-month low near 103.50 yen before edging back up to 104.18 yen The euro was down 0.3 per cent at 149.51 yen and off 0.5 percent at $1.4350
Fear among traders and the gloomier outlook for the global economy weighed on oil and industrial metals such as copper. US crude futures extended losses below $96 a barrel, after diving almost 10 per cent the previous session, while London copper prices also fell further, touching a nine-month low.