World stocks took a beating on Monday and demand for safe-haven bonds and currencies rose as fears gripped investors that a troubled U.S. economy would drag others down with it.
MSCI's main world stock index was down 1.9 percent, nearing its 2007 low. The pan-European FTSEurofirst 300 was down 2.4 percent, taking its 2008 year-to-date losses to 12 percent.
Japan's benchmark Nikkei average earlier lost 3.86 percent to close at a two-year low and MSCI's main emerging market stocks benchmark was down 3.8 percent.
Risk aversion is widespread as the market thinks (the economic downturn) is not just a U.S. centric story, said Paul Robson, currency strategist at RBS Global Banking.
U.S. stock markets were closed on Monday for a holiday, but investors in Asia and Europe were carrying through from last week's concern on Wall Street that a fiscal stimulus proposed by President George W. Bush would not be enough to stop the U.S. economy from falling into recession.
Bush called for a package worth up to $150 billion in tax cuts and other measures.
Stock markets have been in full retreat this year over the economic fears. The broad U.S. S&P index had its biggest weekly fall since July 2002 last week.
Many indexes are now more than 20 percent below their recent cycle peaks, a traditional sign that what is going on is not just a correction but the start of a bear market.
Over the last two years investors have been driven by greed, we're now seeing investors being driven by risk and in both directions, and that can make them irrational, said White Funds Management portfolio manager Angus Gluskie.
The global equity market weakness prompted currency investors to liquidate risky positions, lifting the low-yielding Japanese yen while the dollar gained on the view no country will escape the economic downturn.
The yen rose to a five-month high against the euro, which slipped to a one-month low against the dollar, and high-yielding currencies in general sold off.
The dollar was down 0.7 percent against the yen at 106.05 yen, inching closer to the 2-1/2-year low of 105.90 yen struck last week.
The euro was around 1.4 percent weaker against the yen , slipping below 154 yen for the first time since late August.
The euro was also 0.8 percent down on the day against the dollar at $1.4495, slipping below $1.45 for the first time in a month.
Demand rose for safe-haven government bonds. The March Bund future hit a contract high.
The interest rate-sensitive two-year Schatz yield was at 3.404 percent, 7.2 basis points less from Friday, with the 10-year Bund yielding 3.932 percent, 4.6 basis points less.
(Editing by Mike Peacock)