Japanese shares fell more than 2 percent on Thursday and other Asian markets were on the defensive as confidence in a rally this week proved fleeting in light of a shaky global economy and financial system.
European shares were also set to slide, reversing a two-day winning streak. The yen rose against the dollar amid signs of fund repatriation ahead of the end of Japan's fiscal year this month, and perceptions that recent safe-haven inspired gains for the U.S. currency had gone far enough.
Oil prices bounced from two days of sharp losses though the focus remained on a meeting of OPEC this week and uncertainty about whether the oil producers will cut production or not.
Thursday's stock trading reflected a trend this year of steep declines followed by bursts of small gains that quickly fizzle as investors focus on the bleak global economy and uncertainty about how to cleanse the banking system of toxic debt.
Investors are quite skeptical now, said Albert Hung, chief investment officer at Alleron Investment Management in Australia.
They are behaving very cautiously ... which is prudent because the economy is still in very poor shape and there are no clear signs of recovery yet, he added.
Japan's Nikkei average <.N225> fell 2.4 percent after surging nearly 5 percent on Wednesday.
The MSCI index of shares elsewhere in Asia-Pacific <.MIAPJ0000PUS> were down 0.7 percent as of 0710 GMT (3:10 a.m. EDT), cutting into 5 percent of gains over the previous two sessions.
New signs of global economic weakness continued to sap confidence. Revised data on Thursday confirmed Japan's economy posted its sharpest contraction since the oil crisis of 1974 in the final three months of last year.
Forecasts are proving equally dire. World Bank President Robert Zoellick told the Daily Mail newspaper the global economy is on track for its worst recession since the 1930s, with output likely to shrink by 1-2 percent this year.
Skepticism about policy makers' ability to resolve the global woes, and how the United States will cleanse its banking system, pervades the run-up to the Group of 20 finance ministers' meeting this weekend.
The United States and Britain on Wednesday called on leading economies to ramp up spending to break the global recession and to complement efforts to revamp regulations to prevent future financial crises.
That call has already been met coolly by many European nations, raising doubts about whether the G20 finance gathering in England will make much headway.
Major Asian stocks indexes, including in Australia <.AXJO>, China <.SSEC>, Taiwan <.TWII> and Singapore <.FTSTI> fell.
Seoul <.KS11> shares ended flat, but Bombay shares <.BSESN> rose 2.3 percent as investors played catch-up with gains worldwide following a two-day market holiday.
Among the big regional movers, National Australia Bank
But LG Display <034220.KS> slumped 6.5 percent after Philips Electronics
Double digit losses on equity markets in the past month and turmoil across the banking system have persuaded most economists the global recession will get worse and a recovery will be slow.
Reuters polls show the Great Recession, as the IMF has termed the global downturn, will clamp leading economies in a vicious grip well into 2010 and push unemployment to multi-year record.
Sporadic signs of hope do appear, however, with data on Thursday showing a surge in Chinese bank lending in February helping offset a report that the country's industrial growth had grounded down to a record low.
The yen gained, sending the dollar to as low as 95.95 yen on trading platform EBS, its weakest in two weeks. After trimming some losses, the greenback was down 0.9 percent at 96.29 yen.
The New Zealand dollar briefly touched a two-week high of $0.5145 after the country's central bank cut its interest rates by 50 basis points to a record low of 3.00 percent. The cut was smaller than some had expected.
The currency later fell back to $0.5134, down 0.2 percent on the day.
Oil futures rebounded 60 cents to $42.93 a barrel, cutting back on a 10 percent drop over the previous two sessions that had been sparked by bearish data from the United States and China, the world's two largest oil consumers.
Gold regained some of its safe-haven appeal, rising about $8 to $913.70 an ounce, following recent drops sparked by concerns over weak demand.
Japanese June government bond futures climbed 0.42 point to 138.92 after a smooth five-year auction showed banks' demand for JGBs remained solid.