Doubts about the euro zone's ability to come up with a comprehensive plan to solve its debt crisis hammered equity markets and hit the euro on Thursday, underlying investor impatience with political wrangling.
World stocks as measured by MSCI <.MIWD00000PUS> fell 1 percent, European shares were down 1.3 percent and volatile emerging market equities lost nearly 2.5 percent.
Investors are also increasingly concerned about a slowdown in China's economy, fearing that it will become sharp rather than gradual.
Optimism had been growing that the weekend meeting of European Union leaders in Brussels would come up with a substantial plan for dealing with the debt crisis, primarily through ramping up the bloc's bailout mechanism, the EFSF.
But French President Nicolas Sarkozy said on Wednesday that
plans to tackle the crisis had stalled with Paris and Berlin at odds over how to increase the bailout fund.
This kind of wrangling -- a kind of two steps forward, one step backwards process that has been going on for most of this year -- is wearing on investor confidence in government action.
With the mood they're in at the moment, markets won't even believe anything that is decided (at the summit), said Justin Urquhart Stewart, director at Seven Investment Management.
A report in the Financial Times that a related plan to plan to strengthen Europe's banking system is set to fall short of market expectations also accentuated the mood.
The pan-European FTSEurofirst 300 <.FTEU3> was down 1.5 percent.
Earlier. Japan's Nikkei <.N225> lost 1 percent.
BONDS IN DEMAND
The mood drove investors into core German bonds, where the yield fell 7 basis points.
More significantly, the spread between the German yield and that of France and Spain widened.
Spain was to auction up to 4.25 billion euros of bonds split across three maturities later, a test of investor appetite after Moody's became the latest agency to downgrade its sovereign credit rating.
On foreign exchange markets, the euro fell to $1.3673, which is still a relatively strong rate given the year's focus on the currency bloc's stability.
The euro's downside was considered likely to be limited ahead of the summit.
As long as hopes for a soft-landing (of the crisis) persist, the euro's downside will probably stay firm, at least for this week and next week, said Makoto Noji, senior bond and currency strategist for SMBC Nikko Securities in Tokyo.
I don't think we are in a situation where selling will snowball.
(Editing by Stephen Nisbet)