Fears of rising borrowing costs hit global stocks on Monday with investors nervous about higher government interest rates and a blow-out in credit spreads.
European and Asian stocks were lower after a warning from the Bank for International Settlements about the need for higher interest rates and continuing concerns about troubled U.S. hedge funds. Wall Street looked set for a mixed start.
Demand for safe-haven government bonds was higher and the Japanese yen rebounded from near 4-1/2 year lows against the dollar.
The worries about higher interest rates that have hovered over financial markets this month increased over the weekend when the BIS said central banks around the world should raise rates to curb inflation pressures.
Containing inflationary pressures seems to require further tightening in most jurisdictions, BIS General Manager Malcolm Knight said after the BIS annual general meeting attended by about 250 central bankers.
The hawkish tone added to concerns about two Bear Stearns-managed hedge funds which have been forced to liquidate after losses in collateralized debt obligations (CDOs) backed by subprime -- or risky -- mortgages.
Investors fear both the systemic risk to global assets from hedge fund failure and a crisis in credit markets if there is widespread selling of CDOs, which help insure risk and keep borrowing costs low.
The yield spreads of both emerging market debt and European high-yield credit with government bonds were slightly wider.
European shares fell. The pan-European FTSEurofirst 300 index was down 0.5 percent.
Earlier, Japan's Nikkei dropped 0.56 percent or 101.15 points to and the broader TOPIX index fell 0.74 percent to 1,764.87.
Other Asian shares also fell, among them China's Shanghai Composite Index which lost 3.68 percent on concerns that the government will act again to cool the red hot market.
Demand for government bonds was generally higher. Euro zone government bond prices rose, depressing yields.
The two-year Schatz yield was down 1.1 basis points at 4.438 percent while the 10-year Bund yield was down 1.2 basis points at 4.614 percent.
Benchmark 10-year U.S. Treasury yields were also down, off 1.5 basis points at 5.1218 percent.
On foreign exchanges, the yen rebounded against major currencies as traders sought to reduce risk exposure.
The ultra low-yielding yen last week sank to multi-year lows against a range of higher-yielding currencies -- including a record low against the euro -- but dealers on Monday decided to take profits on these over-extended positions.
The dollar was down around 0.3 percent on the day at 123.41 yen, coming back off Friday's peak of 124.16 yen -- the highest since December 2002.
The euro slid nearly 0.4 percent to 166.03 yen, having reached an all-time high of 166.94 yen the previous session.
The euro was a touch weaker against the dollar at $1.3455.
Oil prices fell as Nigerian unions ended a strike that had threatened to disrupt oil exports.
Benchmark London Brent crude for August fell $1 cents to $70.18 a barrel. The contract touched a 10-month high of $72.25 a barrel early last week as dealers fretted over the potential impact of the indefinite general strike.