Risk aversion triggered by troubles with U.S. mortgage securities rippled across financial markets on Wednesday, depressing European and Asian stocks and boosting safe haven government bonds.
Wall Street looked set for a lower opening.
The risk premium on emerging market debt rose while the Japanese yen staged its biggest jump in two months as investors moved away from popular carry trades funded by borrowing low-yielding currencies.
It's not an atmosphere where people can aggressively take positions in risky assets, said one currency trader for a Japanese bank.
Investors have been increasing unnerved over the past weeks by troubles at two Bear Stearns-managed hedge funds with exposure to subprime -- or high-risk -- U.S. mortgage securities.
A sharp sell-off or failure of such mortgages could raise borrowing costs for companies, threaten banks with bad debts and bring losses to a wide variety of investors.
Overall, there is a fear for a withdrawal of the liquidity that has powered assets over the past few years.
European shares were lower. The FTSEurofirst 300 index of top European shares was down nearly 0.6 percent and has lost about 2.5 percent since this time last week.
Earlier, Japan's Nikkei fell 1.2 percent, while Australia's main stock index dropped nearly 2 percent, its biggest one-day fall since mid-March.
MSCI's measure of Asia-Pacific stocks excluding Japan lost 1.5 percent, falling for a fourth straight session. China's main index, however, was up 2.7 percent.
People are talking about global liquidity taps being turned off, said Stefan Worrall, Japan equity broker at Credit Suisse.
The fears drove some investors into safe haven government bonds, raising prices and lowering yields.
The yield on the 10-year euro zone government bond was down 4.2 basis points at 4.558 percent while the 10-year U.S. Treasury yield was down 1.9 basis points at 5.0635 percent.
Higher yields on such debt have been a worry for investors recently but the subprime concerns have taken the yields off their highs.
On currency markets, there were concerns that widespread risk aversion would lead to an unwinding of carry trades and the yen, a major funding currency, rose. The dollar was down half a percent at 122.54 yen and the euro lost more than 0.6 percent to 164.72 yen.
The popularity of carry trades has been one of the driving factors in a broad slide in the yen that pushed it to a 20-year low against the New Zealand dollar and a 15-year trough against the pound late last week.