World stocks sag on renewed Europe fears

Dow drops below 10,000

World stock markets and the euro tumbled Tuesday on fears Europe's debt crisis will cause a prolonged slump in the region and weaken the outlook for global growth.

Asian markets were also hit hard by reports that North Korean leader Kim Jong Il ordered his military to be on combat alert amid rising tensions on the peninsula.

In Europe, Britain's FTSE 100 fell 2.8 per cent to 4,925.49, Germany's DAX index dropped 2.9 per cent to 5,640.05, and France's CAC-40 sank 3.6 per cent to 3,307.15.

Markets in Spain and Italy, both carrying high debt levels, both fell more than four per cent.

Wall Street fell on the open and, at midday, the Dow Jones industrials average was down 1.64 per cent to 9,901 while the Standard & Poor's 500 fell 1.8 per cent to 1,054.

The euro slid to US$1.2225 early Tuesday from US$1.2398 in New York overnight and not far from the four-year low of US$1.2146 it traded at last week.

News of a bank failure in Spain and the prospect of more painful austerity measures across the region renewed investors' worries about growth in Europe and its impact on major trading partners like the US, Japan and China.

The Italian government was due to announce public sector spending cuts to reduce the deficit by €25 billion (US$31 billion) by 2012 in a bid to convince markets that the country can handle its high debt load.

On Monday, the International Monetary Fund said Spain, which has already passed tough austerity measures, needed to urgently and radically reform its labour market while consolidating the banking sector.

European officials also remained downbeat.

EU Economy Commissioner Olli Rehn predicted Tuesday that growth in the 27-nation bloc won't top 1.5 per cent and the jobless rate will stay close to current highs without reforms over the next five years. He called for greater flexibility for the services sector and the labour market.

Analysts said the coming days will be important for market sentiment - whether investors believe the European Union's US$1 trillion rescue package for eurozone countries can avoid a rapid fall in the euro and protect countries from bankruptcy.

"The test for markets over the rest of this week is whether the panic can pass, and a more measured appraisal return," said Daragh Maher, currency analyst at Credit Agricole CIB.

He noted that while the euro is likely to continue to weaken, the EU rescue measures have addressed the main market pitfalls - by giving Greece time to cut its debt and guaranteeing eurozone countries against the risk of default - which should help stymie any sharp sell-off in the short-term.

In Asia, stock indexes were hit hard by the escalating tensions in the Korean peninsula.

A group in South Korea that monitors events in North Korea said Tuesday that Kim Jong Il last week ordered the military to get ready for combat, shortly after South Korea officially blamed his regime for the March 26 sinking of one of its warships that killed 46 sailors.

South Korean officials and other North Korea monitoring groups could not immediately confirm the report by Seoul-based North Korea Intellectuals Solidarity, which cited unidentified sources in North Korea. The Defence Ministry and the Joint Chiefs of Staff said they have not obtained any signs suggesting unusual activity by North Korea's military.

South Korea's benchmark stock index dropped as much as 4.5 per cent before recovering some to finish 2.8 per cent down at 1,560.83 - its lowest close in more than three months.

The South Korean won slid to its weakest level against the dollar in more than 10 months before paring some losses.

Japan's Nikkei 225 stock average shed 3.1 per cent to 9,459.89 as the yen's strength against the common European currency hammered exporters.

Hong Kong's Hang Seng index fell 3.3 per cent to 19,019.21 while benchmarks in Australia and Indonesia also lost more than three per cent.