World stock markets slid with investors moving away from risky assets on mounting fears of a global economic slowdown, as the US dollar wallowed close to a 15-year low point against the yen.
A worldwide sell-off erupted after the US Federal Reserve and the Bank of England cut their outlooks this week, while investors also shunned risk on signs of slowing industrial growth and rising inflation in China.
A sharp widening of the US trade deficit added to the gloom, triggering fears of a double-dip recession.
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"The global markets have taken a turn for the worse on the back of an intense escalation in risk aversion," said Joel Kruger, currency strategist at foreign exchange site Daily FX.
"Fears over the implications of a downbeat Federal reserve, and signs of a dramatic slowing in the Chinese economy, weigh heavily on investor sentiment.
"UK markets have suffered tremendously as a result, and we believe that the risks from here are for continued downside pressure in the local markets as broader global macro uncertainty takes hold."
The International Energy Agency, which has rare insights into oil market data revealing hidden forces at work in the economy, warned on Wednesday that significant risks to economic recovery could be detected.
The dollar clawed its way back above 85 yen on Thursday, after striking a 15-year low at 84.73 yen on Wednesday as market players sought a safe-haven amid renewed jitters over the health of the global economy.
In early morning European deals on Thursday, Frankfurt shares shed 0.31 percent, London lost 0.37 percent and Paris also retreated by 0.37 percent in value.
Fresh doubts over the strength of the global economic recovery also sent a chill through Asian markets, after Wall Street slumped 2.5 percent overnight.
Shanghai dropped 0.57 percent, Sydney sank 1.23 percent and Tokyo fell 0.86 percent, recouping some earlier hefty losses.
Interest rates on European sovereign bond markets firmed slightly after yields on the benchmark German and French debt bonds fell to historic low points late on Wednesday on a risk-aversion rush into safe assets.
When demand pushes up the price of government bonds, the fixed interest carried by the bonds automatically falls as a percentage of the new price.
The rate on German 10-year bonds edged up to 2.442 percent from 2.427 percent and the French yield to 2.733 percent from 2.715 percent.
The dollar rebounded somewhat after a "verbal intervention" from Japanese leaders, who voiced concerns over the yen's strength, dealers said.
Prime Minister Naoto Kan said on Thursday that the yen's rise was "rapid" and agreed with his right-hand man and Chief Cabinet Secretary Yoshito Sengoku to follow the situation, Japanese reports said.
Investors were closely watching whether Japanese authorities will act for the first time since 2004 to stem the yen's strength.
The euro fetched 1.2923 dollars, up from 1.2868 in New York late on Wednesday, when the single currency had tumbled below the sensitive 1.30-dollar level.
Wall Street had nosedived on Wednesday as data showing the US trade gap had widened sharply in June -- to the highest level in 20 months on the back of rising imports -- rekindled fears of a second-dip recession.
The markets' grim assessment was also coloured by the downbeat view taken by the Fed on Tuesday, which warned that recovery in the world's largest economy was slowing and opted for further stimulus measures.
The Dow Jones Industrial Average tumbled 2.49 percent to end at 10,378.83 points on Wednesday, posting its the worst percentage drop in nearly a month.
"Overnight, US stocks were pummelled, albeit it on relatively low volume, as concerns about the economic health of the global economy continued to weigh on investor sentiment," said IG Index analyst Cameron Peacock.
"Softer-than-expected economic data out of China yesterday, on top of the Fed's more bearish assessment of the US economy the previous day saw investors flee from equities and into perceived safe havens such as treasuries, the dollar and the yen."
The dollar also hit a 15-year low point against the yen on Wednesday after the Fed promised fresh measures to help stimulate the faltering US economy, dimming the chances of a US interest rate hike any time soon.
The strong yen poses a threat to the export sector driving Japan's own fragile economic rebound, with companies facing huge hits to overseas profits when repatriated.
Japanese factory output has slowed recently amid the global uncertainty, while data on Wednesday saw much lower than expected orders for machinery in a sign of cautious capital spending.
