Political leaders failed to halt a global stock market rout that gathered steam on Monday as investors lost confidence that Europe and the United States can rein in their budgets quickly and fear spread of a double-dip recession.

The European Central Bank swept into the bond market to buy up Italian and Spanish debt and sling a safety net under the euro zone's third and fourth largest economies. But bickering persisted in Europe over a longer-term rescue plan.

In the United States, President Barack Obama called for urgent action on the U.S. budget deficit but his proposal on taxes was promptly rebuffed by Republicans.

The G7 finance ministers' and central bankers' pledge on Sunday to help smooth markets if needed provided little solace.

Selling that began in Asia and Europe accelerated in the United States, where the broad Standard and Poor's 500 index plunged 6.7 percent to close at 1,119.46, its worst sell-off since December 1, 2008. The Dow Jones shed 634.76 points to 10,809.85.

A huge blow to investor confidence was the Standard and Poor's downgrade of the U.S. sovereign credit rating late Friday, which compounded spreading concerns that the worsening euro-zone debt crisis and a faltering U.S. economy heighten the risks of a double-dip recession.

People are asking, can the economy still grow in face of all this? said John Carey, portfolio manager at Pioneer Investment Management in Boston, with $260 billion under management.

Realization on both sides of the Atlantic that the political obstacles to quick budgetary reform are so huge and the monetary options so limited, it has deepened the pessimism.

The worsening market turmoil puts significant pressure on the U.S. Federal Reserve at its regular policy meeting on Tuesday to announce some fresh measures of support for a damaged U.S. economy.

If the Fed does nothing, it could prove to be a disappointment at this point, said JP Morgan analysts.

Stock losses have wiped more than $3.8 trillion from investor wealth globally in the last eight days and sent investors rushing for safety in the Swiss franc, the Japanese yen and gold. In the United States, estimates of recession risks are rising. Goldman Sachs had put them at one in three last week, before the latest sell-off.

This massive move in the equity market does dim the economic outlook for the next six months, said Carl Riccadonna, senior U.S. economist at Deutsche Bank in New York. We would put the recession odds at about 40 percent and about two weeks ago they were at about a 10 percent chance.

The G7 financial policymakers from major industrialized nations said on Sunday they stand ready to provide extra cash if markets seize up, are consulting regularly and could cooperate to smooth volatile FX markets if needed.

Particularly worrisome was a more than 20 percent plunge in the shares of Bank of America, the largest U.S. bank. AIG sued it for $10 billion for allegedly deceiving investors, on top of mounting concerns about the size of its potential losses from mortgages litigation and questions about management. The bank has shed nearly one third of its market value in three days.

ECB TO THE RESCUE

On the political front, Obama said he hoped that Standard and Poor's stripping the United States of its prized AAA credit rating would add urgency to U.S. budget cutting plans.

Standard and Poor's cut the ratings of credits tied to the U.S., sovereign debt to AA-plus, namely government mortgage agencies, clearing houses and insurers. The Treasury market soared on Monday despite the downgrade as investors fled stocks.

Obama called for both tax hikes and cuts to welfare programs as part of the $1.5 trillion in deficit reduction that a special committee would deliver in late November. But Republican House Speaker John Boehner once again rejected the call, saying tax hikes were simply the wrong approach.

Obama also spoke with Italian Prime Minister Silvio Berlusconi and Spanish President Jose Luis Zapatero, welcoming measures by their governments to address the economic turmoil in Europe.

Traders estimated the ECB bought about 2 billion euros in Italian and Spanish debt after it agreed on Sunday to broaden its bond-buying program for the first time to halt an attack on the Mediterranean countries.. Italian and Spanish yields declined sharply.

The intervention by the European Central Bank this morning seems to have been working, Irish Finance Minister Michael Noonan told RTE public radio.

Last week the risk was that as bond rates in Italy went toward 7.0 percent, they'd be driven into some kind of bailout program. They have fallen by almost one percent this morning so they are well out of the bailout territory now.

But French sovereign credit default swaps hit a record high of 160 basis points as the U.S. rating downgrade raised questions about how long other AAA countries, such as France, could hold onto their top-notch ratings.

The ECB move was seen as only a temporary solution however, due to the sheer size of Italy's bond market -- $1.6 trillion. European stocks sank to their lowest in nearly two years, with the German DAX closing down 5 percent as doubt about governments' ability to deal with the euro zone debt crisis and its impact on economic growth emerged.

A bailout of Italy would overwhelm Europe's emergency fund. Germany has so far opposed expanding it, a view unchanged on Monday, but French Finance Minister Francois Baroin said: The allotment is 440 billion (euros) and we've already said if we need to go further we will go further.

(Additional reporting by Jonathan Stempel, Lucia Mutikani, Joe Rauch Laura MacInnis, David Lawder and Mark Felsenthal in Washington, Sarah Marsh and Noah Barkin in Berlin, and Gerard Bon and Paul Taylor in Paris. Writing by Stella Dawson; editing by Christopher Wilson)