Asian shares fell on Tuesday, with Japan's Nikkei flirting with a 26-year low, as concerns grew about the global financial system, while emerging currencies such as the South Korean won extended their recent sell-off.
Strong gains in Asian shares on Monday were completely erased as optimism over reports that the U.S. government could take a bigger stake in Citigroup
Traditional investor havens in times of turmoil such as the dollar and gold dipped, though analysts predicted these asset classes could soon resume their recent rallies as the uncertainty in global markets continues.
The problem is not with only one bank or one country. Investors are losing confidence, seeing U.S. and European stock markets continue to slide, said Hwang Chang-joong, an analyst at Woori Investment & Securities in Seoul.
Problems in the global financial system continue to multiply as massive credit losses and recession weigh on lenders.
American International Group Inc
But policymakers have yet to convince investors they can successfully tackle the global financial woes that have ignited a worldwide recession.
Japan's Nikkei stock average slid 2.6 percent, hurt by exporters such as Canon Inc <7751.T> and banking shares after worries about financial system stability sent U.S. stocks to a 12-year low.
Japanese Finance Minister Kaoru Yosano said the government was studying measures to support the stock market, as the Nikkei briefly fell as low as 7,155.16, breaking below the October 27 closing level of 7,162.90, its lowest finish since October 1982.
Shares in Japan's Nomura Holdings <8604.T>, the country's biggest brokerage, slumped nearly 9 percent after it announced a big share sale to shore up its balance sheet.
The MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> dropped 2.3 percent as of 0230 GMT (9:30 pm EST Monday), erasing its 1.7 percent gain on Monday.
The gauge is approaching its post-financial crisis low of 194.03 hit in late November, which had marked the lowest in about five years.
Key indexes in South Korea <.KS11> and Hong Kong <.HSI> dropped more than 3 percent each, while Singapore <.FTSTI>, Australia <.AXJO> and Shanghai <.SSEC> fell around 1 percent each.
U.S. regulators on Monday reinforced their willingness to provide extra funds to financial institutions that need it, as they look to begin assessing major institutions' capital needs on Wednesday under a new stress test program.
New government assistance to Citgroup could fuel speculation that Washington may need to step in to help other lenders as well, while doubts remain about government efforts to stabilize the plunging housing market, where the credit crisis began.
EMERGING CURRENCY HIT
Emerging Asian currencies were among the hardest hit by the continued market turbulence. The won was quoted at 1,509.1/0.1 per dollar as of 0005 GMT, compared with Monday's domestic close of 1,489.0.
South Korean markets have been battered by a collapse in Asian exports amid the global demand slump, and by the economy's reliance on short-term overseas debt that needs to be refinanced in the toughest market conditions in years.
Still Asian currencies have fared less badly than in parts of emerging Europe, which led central European policymakers to take on Monday the unprecedented step of joint verbal intervention to support their currencies.
Among major currencies, the dollar dipped 0.3 percent from late U.S. trade to 94.34 as some investors booked profits on the previous day's rally, when the U.S. currency struck a three-month high of 94.95 yen on trading platform EBS.
The euro edged down 0.1 percent to $1.2675, staying under pressure after European Central Bank President Jean-Claude Trichet said on Monday the euro-zone financial system is under severe strain.
The weak global demand outlook continues to undermine oil prices, sending oil futures down 36 cents on Tuesday to $38.08 a barrel, extending declines from the previous session.
Gold, which typically benefits during times of extreme volatility, fell by about $5-$6 to $985.35 an ounce as investors took profits after a recent sharp rally, while options-related selling also weighed.
(Additional reporting by Rhee So-eui in SEOUL; Editing by Kim Coghill)