Global stockmarkets slumped yesterday as a surprise German strike against speculative trading backfired, panicking nervous investors instead of reassuring them the authorities were fully in control.
Dealers said Germany's unilateral overnight move to ban naked short selling in eurozone government bonds, associated insurance derivatives and 10 major financial stocks only added to a sense of crisis in Europe.
German Chancellor Angela Merkel's later warning that stringent regulation and fiscal rectitude were needed to ensure the survival of the eurozone was taken as a sign of desperation, rather than as a commitment to fix Europe's debt problems.
Ms Merkel has "thrown her toys from the pram" in a fit of pique, said Howard Wheeldon from BGC partners in London, adding that she appeared "determined to undermine the euro and the euro economy at this particularly difficult time.
"It seems to me that all the German chancellor has managed to do by this affront to market integrity is succeed in fuelling more fears that the European sovereign debt crisis may just be even worse than it looks," Mr Wheeldon said.
Markets in Asia were the first to react - badly - to the German lead, setting up Europe and then Wall Street for another tough day as investors tried to get ahead of the curve.
In New York, the blue-chip Dow Jones Industrial Average was down 1.24 per cent at around 1545 GMT, extending losses of more than one per cent on Tuesday, with the tech-rich Nasdaq Composite off 1.50 per cent.
"The US equity markets are following the European markets' lead (as the German move)... continues to exacerbate euro-area concerns and dampen optimism for the continued economic recovery," Charles Schwab analysts said in a note.
In London, the benchmark FTSE 100 index of leading shares lost 2.81 per cent to 5,158.08 points. In Paris, the CAC 40 slumped 2.92 per cent to 3,511.67 points and in Frankfurt the DAX shed 2.72 per cent to 5,988.67 points.
Other European markets saw substantial losses too, with none spared the general sell-off.
"Angela Merkel's knee-jerk reaction to ban speculators from short-selling debt has sent the markets into a tailspin," ETX Capital senior trader Manoj Ladwa said in London.
"Her decision is likely to have a serious negative impact on not only the euro but also other European countries which may impose a similar restriction," Manoj Ladwa said.
Ms Merkel called for a radical overhaul of Europe's fiscal rules along German lines, warning of "incalculable consequences" for the EU if the euro failed.
"The current crisis facing the euro is the biggest test Europe has faced in decades, even since the Treaty of Rome was signed in 1957," she said in a speech in parliament, referring to the treaty that created the EU.
"This test is existential and it must be overcome... if the euro fails, then Europe fails," Ms Merkel added.
Naked short selling is when investors sell stocks or bonds they do not own and have not even borrowed, hoping to be able to buy them back later at a lower price, often the same day, thereby earning a profit.
The practice, banned in many countries at the height of the global financial crisis, can exacerbate market movements and can add greatly to volatility in times of stress, as now.