Japan's Nikkei plumbed a 2007 low and other Asian stock markets fell as much as 6 percent on Wednesday as investors shunned risky trades amid growing credit jitters, pushing the yen to a 4 and a half month high.
The nervous sentiment is set to hit Europe, where financial bookmakers are calling for falls of half a percent or more for major indexes.
Among the hardest hit were emerging Asian markets assets, prompting what traders suspect was intervention from central banks in Malaysia, Indonesia and the Philippines to smooth declines in their currencies.
But safe haven plays shone with the key 10-year Japanese government bond (JGB) futures rising to their highest level since March.
Concerns about the credit market grew after a U.S. investment firm wanted to halt redemptions on Tuesday and a Canadian trust couldn't find funds to repay some short-term debt.
Sentiment took a further hit after Wal-Mart, the world's largest retailer, cut its profit forecast.
On top of the ongoing turmoil at financial institutions hit by the U.S. subprime problems, we started to see the impact on the U.S. economy as well as corporate earnings, said Norihiro Fujito, general manager of investment research and information division at Mitsubishi UFJ Securities.
Tokyo's Nikkei average fell 2.2 percent to its lowest close since December, while MSCI's measure of Asia Pacific stocks excluding Japan was down 2.8 percent at 2-Â½ month lows by 2:24 a.m. EDT.
The MSCI index is down about 12 percent from the July 24 record high, halving its year-to-date gains. The correction is the biggest since the 18 percent decline between May and June last year.
Investors dumped financial stocks, sending both Japan's top lender Mitsubishi UFJ and Australia's top investment bank Macquarie Bank down more than 5 percent, while Singapore's DBS dipped 4.3 percent.
Exporters weren't spared as worries about the health of the U.S. consumers grew after Wal-Mart's disappointing profit forecast. Sony Corp., Toyota Motor Corp. and Taiwan's contract chip maker TSMC all lost ground.
It's natural that Toyota is sold and so are Japanese digital home electronics makers as they're the ones which supply goods to Wal-Mart, Fujito added.
In mainland China, the benchmark Shanghai Composite Index hit a fresh life high before reversing direction on profit taking to be a touch lower in late trade.
Elsewhere in the region, Hong Kong shares and Taiwan shares fell more than 3 percent, while Jakarta stocks tumbled 6 percent.
The fall in risk appetite pushed the yen up for a third straight session against the dollar and euro as investors continued to avoid risky carry trades.
A carry trade involves borrowing low-interest rate currencies such as the yen to buy higher-yielding but riskier assets.
The dollar dropped to 4-Â½ month lows below 117 yen while the euro fell 1 percent to a fresh 4-Â½ month and was nearing 157 yen.
Against the dollar, the single currency slid towards $1.3470, a level last seen in late June.
Higher-yielding currencies such as the Australian and New Zealand dollars were also under pressure. The Aussie fell to an 11-week low versus the dollar and hit 4-month lows against the yen.
Investors are still exiting overweight positions in risky assets, and in the currency markets the large net long speculative positions being unwound are in the Aussie, Kiwi, sterling and euro, said nabCapital currency strategist John Kyriakopoulos.
Emerging Asian currencies were also on the backfoot with investors pushing the rupiah to one-year lows below 9,400.
Reflecting heightened risk aversion, spreads of emerging market sovereign bonds over U.S. Treasuries widened by 2 basis points to 217, following a 10-basis point widening overnight.
Money markets in the region were mostly calm, although some Australian bill futures spiked on strong demand for short-term liquidity.
The Bank of Japan drained funds from the banking system for a second session having earlier injected cash, along with central banks around the world, to avert a financial panic.
Flight to safety and growing doubts over whether the Bank of Japan will raise interest rates in the near-term helped drive the 10-year JGB futures to five-month highs.
The chances of a rate hike this month have dwindled, but there is growing speculation that a September hike may also be unlikely and that the BOJ will wait until later in the year to raise interest rates, said Hiroyoshi Sandaya, a fixed-income strategist at Goldman Sachs.
The benchmark 10-year cash yield fell 6 basis points to 1.640 percent, its lowest in nearly three months.
Metals fell, with gold and copper both weaker, while London Brent crude edged up 42 cents to $70.93 a barrel as concerns that weather systems developing in the Gulf of Mexico could disrupt.
(Additional reporting by Umesh Desai)