World stock markets fell sharply again yesterday on growing fears of a fresh banking disaster in the eurozone as France and Belgium moved fast to help lender Dexia amid gloomy talk on US growth from Federal Reserve chief Ben Bernanke.

Asia and then Europe posted substantial losses but US markets held up slightly better, helped by some recent better-than-expected data, but Mr Bernanke’s remarks that the Fed might act to support the economy again gave the game away.

Fears the eurozone debt crisis could be about to snare the banks spiked after shares in Franco-Belgian bank Dexia lost a third of their value before recovering to close with a loss of about 20 per cent as it became clear a government bailout was in the works.

Responding to the turmoil, France and Belgium said they would guarantee the debts of the troubled cross-border bank that had to be saved in 2008 as the global financial crisis deepened with the collapse of Lehman Brothers.

“Dexia’s problems stress the point that for eurozone leaders (that) the Greek crisis is less about Greece and more about the potential for it to spark a much more widespread banking and economic disaster,” said Rabobank analyst Jane Foley.

Dov Adjedj of Aurel BGC in Paris said investors were caught in the “morose mood around Greece”, with grim talk from Mr Bernanke “sprinkled into the mix”.

“Despite some recovery late in the day, the session “was a negative one,” Mr Adjedj said. In Europe, London’s FTSE-100 index of leading shares lost 2.58 per cent to 4,944.44 points. In Frankfurt, the DAX tumbled 2.98 per cent to 5,216.71 points and in Paris the CAC-40 shed 2.61 per cent to 2,850.55 points.

Elsewhere in Europe, Madrid lost 1.54 per cent, Lisbon 2.18 per cent, Milan 2.72 per cent, Amsterdam 2.02 per cent and Brussels 3.13 per cent.

US stocks recovered from session lows but remained downbeat after Mr Bernanke warned Congress that budget-cutting could hit already-feeble growth and delay job creation.

In midday trading, the Dow Jones Industrial Average was down 0.93 per cent; the broader S&P 500 was off 0.53 per cent while the tech-heavy Nasdaq Composite brooked the trend and added 0.88 per cent.

“Against this bearish backdrop, the Dow Jones Industrial Average is bracing for a third straight triple-digit drop, while the broader S&P 500 Index is headed even deeper into annual-low territory,” said Andrea Kramer of Schaeffer’s Investment Research.

Asian markets tumbled with Tokyo losing 1.05 per cent and Hong Kong 3.40 per cent.

In London trade, the euro slumped to $1.3146 – the lowest level since mid-January. It later stood at $1.3284, up from $1.3178 late in New York on Monday.

The single currency meanwhile edged back up to 102.14 yen after having traded earlier at 100.76 yen – the lowest level since 2001.

Dexia, which specialises in providing financing to local authorities especially in France, could be the first major banking victim of the eurozone debt crisis, brought down by a credit crunch.

Data from the European Central Bank showed eurozone banks deposited the biggest amount of overnight funds at the ECB so far this year in a signal that interbank lending has frozen.

“Investors are facing the real possibility that bank exposures to sovereign debt and an increasing shut down in interbank lending markets could trigger a new banking crisis,” said Joshua Raymond, chief market strategist at City Index.

“Bank shares have seen high volatility which in itself is exacerbating investor fears and uncertainty over the crisis,” he said.

Eurozone finance ministers on Monday said they would once again delay releasing a much-needed eight billion euros to Greece to help it meet its debt obligations after Athens admitted it would miss its deficit targets.

Eurogroup chairman Jean-Claude Juncker said on Monday that eurozone partners had asked the Greek government to take moves to ensure further savings in 2013 and 2014.

That would then lead to a “definite and final decision in the course of October”, Mr Juncker said.

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