Japan's economy emerged from its longest recession in at least 60 years in the second quarter, but souring sentiment among U.S. consumers highlighted the fragile nature of the global recovery.
Stocks tumbled from 10-month highs as investors worried that a five-month rally in equities had outpaced economic fundamentals, with oil and industrial metal prices also sliding sharply.
Japan's economy grew 0.9 percent in the second quarter, becoming the third G7 country after Germany and France to pull out of recession, according to preliminary figures released on Monday.
But the growth, the first in five quarters, slightly lagged forecasts and analysts said it will be a long road to a sustained recovery in the world's second-largest economy.
"Today's data was driven by stimulus steps in Japan and overseas, so Japan's economy is far from self-sustaining growth," said Kyohei Morita, chief economist for Japan at Barclays Capital.
"The growth level for the July-September quarter will likely be similar to that of April-June, and the pace of growth is expected to slow down thereafter as the effects of government stimulus run their course."
European Central Bank Governing Council member Axel Weber also warned against assuming the financial crisis had passed.
The German economy grew unexpectedly in the second quarter, posting a surprise 0.3 percent expansion that has boosted hopes of recovery in the wider euro zone.
"I warn against prematurely declaring the financial crisis to be over," Weber told the Sueddeutsche Zeitung newspaper in an interview to be published on Monday, adding however that the economy had passed its low point.
MARKETS RATTLED
While trillions of dollars in government stimulus spending appears to have averted a 1930s style Great Depression, U.S. data on Friday showed rising unemployment and falling incomes were still hurting consumer confidence.
The Reuters/University of Michigan Surveys of Consumers showed consumer confidence fell more than expected in early August, dropping to its lowest level since March.
"Even though economic output is probably increasing again, consumers certainly appear to still be in a funk. This is not entirely surprising given how many jobs are still being lost," said Abiel Reinhart, an economist at JP Morgan in New York.
The weak consumer data rattled investors who had pushed global stocks up as much as 59 percent from their March lows and knocked $3 a barrel off oil prices on Friday.
Oil fell further on Monday, dipping below $67 a barrel, while copper and zinc also retreated. The yen rose as investors unwound recovery bets on commodity currencies such as the Australian and New Zealand dollars.
"Weak data is no longer treated as a harbinger of an economic apocalypse, but as an indication that the forthcoming period of growth is likely to be frustratingly tepid relative to the rich valuations of risk-sensitive asset markets," said David Watt, senior currency strategist at RBC Capital Markets.
Japan's Nikkei average fell 2.6 percent and MSCI's index of stocks elsewhere in the Asia-Pacific slipped 2.5 percent, led by a fell of as much as 3.3 percent in China's Shanghai Composite Index
CHINA ASSET HUNT
After leading the world in the first seven months of the year, Chinese stocks have tumbled 15 percent in August on fears of overheating and concerns about new supplies of equity.
"Market volatility continues today and will continue in the near term because of uncertainties surrounding China's economic recovery and government policy towards the stock market," said Zhou Lin, stock analyst at Huatai Securities in Nanjing.
China, which has been carrying much of the hopes for leading the world economy back to health, has seen its rebound moderate after a powerful second-quarter surge.
But it is stepping up its pursuit of assets made cheaper by the global financial turmoil that erupted last year.
China Investment Corp (CIC), the country's $200 billion sovereign wealth fund, is set to pour up to $2 billion into the U.S. mortgage system by joining the U.S. Treasury-backed Public-Private Investment Plan (PPIP), sources told Reuters on Monday.
The PPIP scheme is designed to combine taxpayer money with private capital to buy as much as $40 billion in toxic securities from banks.
Chinese steel mills also agreed an iron ore supply deal with Australian miner Fortescue Metals Group at a slight discount to earlier deals, in exchange for up to $6 billion in funding.