World stock markets slumped today on Federal Reserve warnings of serious downside risks to the world's biggest economy, with investors fleeing to safe-haven currencies and assets.
Dealers' screens were awash with red as the Fed's latest liquidity move to shore up the American economy fell flat just as economic leaders descended on Washington to hear urgent warnings on the eurozone debt crises in IMF and World Bank annual meetings.
"It's the ever increasing threat of another recession that is really spooking investors," said analyst Simon Denham at Capital Spreads.
Europe's major stock markets tumbled. Paris' CAC-40 index sank 5.25 percent to close at 2,781.68 points. In Frankfurt the DAX fell 4.96 percent to 5,164.21 points and London's FTSE-100 index of leading shares was down 4.67 percent to 5,041.61 points.
Milan slid 4.52 percent and Madrid tumbled 4.62 percent on fears that Italy and Spain could fall victim to the fast-moving eurozone crisis. Lisbon fell 5.22 percent, Brussels 5.34 percent, Amsterdam 4.44 percent and Vienna by 6.09 percent.
In Asia, Hong Kong nosedived 4.85 percent to its lowest finish since July 2009 and Sydney plunged 2.63 percent to its worst close in more than two years. Tokyo shed 2.07 percent and Shanghai lost 2.78 percent.
Investors piled into safe-haven assets, with the dollar and yen rising against the euro.
In late London deals, after hitting an eight-month low, the euro fell to $1.3437 from $1.3564 on Wednesday. The euro traded at 102.58 yen, from 103.74 Wednesday, after hitting a ten-year low earlier in the day.
The dollar fell against the yen to 76.36 yen from 76.48 on Wednesday.
The yield on German government bonds, another safe-haven asset, fell to a record low of 1.665 percent.
The Fed announced overnight that it would shift $400 billion in its shorter-term debt portfolio holdings to longer-term bonds, a move it said would lower rates for mortgage holders and businesses.
But the widely-expected plan -- nicknamed 'Operation Twist' -- was overshadowed after the Fed warned of "significant downside risks to the economic outlook" amid high unemployment, slow growth and a depressed housing market.
Wall Street was again sharply down after falling steeply Wednesday, with the Dow Jones Industrial Average down 3.22 percent to 11,121.89 points in midday trade, the broader S&P 500 dropping 2.86 percent to 1,133.38 points and the tech-heavy Nasdaq Composite slumping 2.60 percent to 2,472.25 points.
Mexico's stock exchange was down 3.59 percent and in Brazil, the Sao Paulo stock market plunged 3.49 percent at opening. Brazil's currency, the real, also fell against the dollar to its lowest level in two years at 1.92 reals to the dollar.
Michael Hewson of CMC Markets said "European markets have plunged today on a trifecta of different factors, starting with disappointment about last night's measures by the Federal Reserve as well as its downbeat assessment of the US economy."
He added that "fears about a slowdown in China on disappointing HSBC manufacturing PMI, which contracted for the third month in a row, and disappointing eurozone, French and German manufacturing PMI's data," also weighed on sentiment.
"At various points throughout the day the all major companies of all the major indices were in negative territory," Hewson said.
Leaders of six major economies including Britain and Indonesia added to the pressure on the US and EU calling on eurozone governments to urgently tackle their debt crisis.
The heads of the World Bank and IMF warned that Europe and the US risked "suffocating" the global economy if they didn't get control of their economies.
World Bank president Robert Zoellick called for action, warning: "The world is in a danger zone."
The IMF's Christine Lagarde said that risks to the global economy have increased, "but there is a way forward, if countries act now, act boldly, and act together."
But on the markets, with no concerted signs coming from politicians, bleak signals from the Fed carried the day.
"While Operation Twist was well anticipated perhaps the severe warning from the Fed that 'there are significant downside risks to the economic outlook' was not," noted Rabobank analyst Jane Foley.
Sentiment was further damaged by escalating concern over the banking sector in Europe, linked to contagion from the eurozone debt crisis and downgrades by Moody's on three top US banks -- Bank of America, Wells Fargo and Citigroup. French banks were again hit hard with shares in Societe Generale and Credit Agricole down more than nine percent and Franco-Belgian bank Dexia down more than 11 percent on Thursday.
"Equity markets have been bombarded by bad news after bad and this week looks to have been as bad as any so far," added analyst Denham.