The single currency fell to 10-week low of 1.2563 against U.S. dollar after Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe. Standard & Poor's also said it may review emerging Europe bank ratings as the credit crisis has limited Western European banks' ability to fund subsidiaries. Warnings from two credit ratings agencies added concerns the financial turmoil will deepen, especially in Eastern Europe.

Japan Finance Minister Nakagawa's announced that he would resign after the government's budget is passed by the Lower House of Parliament. Rumours that he may have been drunk at the G-7 conference over the weekend (denied by Nakagawa) may have led to the decision and this is seen as negative for PM Aso's cabinet. The greenback rallied from 91.56 to 92.75 against the Japanese yen on Tuesday.

On the data front, total net purchases of U.S. long-term equities, notes and bonds by foreign investors increased in December to $34.8 billion, compared with downwardly revised outflows of $25.6 billion in the prior month. Federal Reserve reported its manufacturing activity index plunged to a record low of -34.65 this month.

The British pound fell initially to 1.4123 and then rebounded to 1.4314 after an Office for National Statistics report indicated inflation slowed last month less than forecast. Consumer prices in the U.K. rose 3% in January from a year earlier, compared with the economists’ expectation of an increase of 2.7%, after a 3.1% increase in the previous month. The inflation data added speculation the Bank of England will reduce the pace of interest-rate cuts.

The Standard & Poor’s 500 Index decreased by 37.52 points or 4.6% to close at 789.32. Dow Jones industrial average fell by 297.81 points or 3.79% to end at 7552.60. The Nasdaq Composite Index tumbled 63.70 points or 4.15% to finish at 1470.66. Investors' demand for safety on Tuesday pushed U.S. government bond yields down. 10-year Treasuries yields dropped 0.25 percentage point, the most in two months, to 2.64%. Spot gold rallied to a seven-month high of 974.20.

Wednesday will see the release of Japan’s leading indicators, U.K. CBI industrial trend survey, U.S. building permits, housing starts, import price index, export price index, industrial production and capacity utilization.