World stocks tumbled on Monday as fears gripped investors that a sliding US economy would drag others down with it.
Demand for safe-haven bonds and currencies soared.
MSCI's main world stock index, a benchmark gauge of stock markets globally, was down 2.9 per cent, falling below its 2007 low to levels last seen in December 2006.
"A mixture of weak global economic data, poor corporate data, increasing fears about the possibility of a recession ... have left investors drowning in a sea of red," said Henk Potts, equity strategist at Barclays Stockbrokers.
The pan-European FTSEurofirst 300 was down 5.8 per cent, taking its 2008 year-to-date losses to more than 15 per cent.
Japan's benchmark Nikkei average earlier lost 3.86 per cent to close at a two-year low and MSCI's main emerging market stocks benchmark was down 3.9 per cent.
"Risk aversion is widespread as the market thinks (the economic downturn) is not just a US centric story," said Paul Robson, currency strategist at RBS Global Banking.
US stock markets were closed on Monday for a holiday, but investors in Asia and Europe were carrying through from last week's concern on Wall Street that a fiscal stimulus proposed by President George W Bush would not be enough to stop the US economy from falling into recession.
Bush called for a package worth up to $150 billion in tax cuts and other measures.
Stock markets have been in full retreat this year over the economic fears. The broad US S&P index had its biggest weekly fall since July 2002 last week.
Many indexes are now more than 20 per cent below their recent cycle peaks; a traditional sign that what is going on is not just a correction but also the start of a bear market.
Such falls sometimes signal to large investors that it is time to buy. But leading investment bank Morgan Stanley said on Monday that that was not the case now, at least as far as Europe was concerned.
"We are not compelled to buy yet despite bearish sentiment," its European equity strategy team said in a note. "We continue to prefer cash over equities."
The global equity market weakness prompted currency investors to liquidate risky positions, lifting the low-yielding Japanese yen while the dollar gained on the view no country will escape the economic downturn.
The yen rose to a 2-1/2 year high against the dollar and high-yielding currencies in general sold off.
The dollar was around 1 percent weaker against the yen at 105.72 yen. The euro was around 1.8 percent weaker against the yen, slipping below 154 yen for the first time since late August.
The euro was also 0.9 per cent down on the day against the dollar at $1.4485, slipping below $1.45 for the first time in a month.
Demand rose for safe-haven government bonds.
The interest rate-sensitive two-year Schatz yield was at 3.355 per cent, sinking 12.2 basis points. It's down 65 basis points so far in January, well on track for its biggest monthly decline in over 10 years, according to Reuter's charts.
The 10-year Bund yielded 3.911 percent, down 6.7 basis points.