European debt fears return

• MF Global becomes first American casualty

Global stocks fell sharply Monday on concerns about Italy's ability to tame its colossal debts and the news that a US brokerage firm filed for bankruptcy over its potential exposure to bad European government debt.

The New York Federal Reserve suspended MF Global Holdings from conducting new business as a Treasury bond dealer Monday and hours later the firm sought bankruptcy protection after reportedly investing US$6 billion in sovereign bonds issued by European countries.

Trading in MF Global stock was halted.

"The news that MF Global is in a perilous financial position has contributed to weakness in equity markets today," said Louise Cooper, markets analyst at BGC Partners. "It is being billed as the first American failure, thanks to the eurozone crisis."

US stock markets followed their counterparts in Europe and Asia in sinking. The Dow Jones industrial average was down 1.26 per cent at 12,076 mid-afternoon while the broader Standard & Poor's 500 index fell 1.33 per cent to 1,268.

In Europe, the FTSE 100 index of leading British shares closed down 2.8 per cent at 5,544.22 while Germany's DAX fell 3.2 per cent to 6,141.34.

Milan exchange closed down

The CAC-40 in France ended 3.2 per cent lower at 3,242.84 while the Milan exchange closed down 3.8 per cent. The shine came off the euro too after its big advance to over US$1.40 last week. It was trading 1.5 per cent lower at US$1.3930.

Last week, stocks had enjoyed one of their best weeks in months as investors breathed a sigh of relief that eurozone leaders finally presented the outline of a convincing anti-crisis strategy.

The three-pronged strategy of boosting the bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing the banks to raise more capital was largely viewed favourably by the markets, although details need to be ironed out.

Many analysts, however, think Europe will end up having to do more, especially if bond market investors continue to ask for more in return for buying up Italian debt - a poorly received Italian auction Friday has fuelled new concerns.

Italy is the eurozone's third-largest economy and only Greece has more debt as a percentage of national income. Italy's debts dwarf the €1 trillion (US$1.4 trillion) that Europe's bailout fund will have at its disposal if last week's commitments are delivered.

"Following last week's euphoria over the plan, investors are in a more sceptical mood this week," said Sal Guatieri, an analyst at BMO Capital Markets.

"In our view, while the plan will help contain the risk of a European banking crisis and financial contagion to other countries, it falls well short of resolving the crisis."

Earlier in Asia, the main point of interest in financial markets was the Bank of Japan's latest intervention to weaken the yen, which had hit a new post World War II high against the dollar.

The dollar surged about five per cent to above 79 yen for a while, before slipping back to 78 yen.

Analysts are sceptical over whether the intervention will have a long-lasting impact. Previous efforts this year have provided only short-term relief.

The intervention is likely to feature at a summit of leaders from the Group of 20 industrial and developing nations in Cannes, France, later this week. How to get the global economy moving again is likely to the main topic of debate.