Asian share markets, already ragged after five months of turmoil, fell deeper on Monday as rising U.S. inflation and high oil prices fanned concerns the Federal Reserve may be unable to make deeper rate cuts to prevent a possible recession.
Japanese government bonds slipped and the dollar rose to a 2-month high on expectations of a slower pace of U.S. monetary easing. Crude oil prices also rose, supported by a U.S. winter storm and renewed tensions in the Middle East as Turkish planes bombed Kurdish rebels in northern Iraq.
Shares fell across board with Australia's benchmark stock index nursing its worst daily percentage fall in four months.
European stock markets were also expected to suffer with financial bookmakers in London calling Britain's FTSE 100 Germany's Dax and France's CAC index to open more than 1 percent lower.
Since August, global financial markets have been rocked by a U.S. subprime mortgage crisis, which has dried up credit. Central banks around the world have been cutting rates and intervening in money markets to ease some of the worst strains in the financial system. But investors are still extremely nervous.
Australia's S&P/ASX 200 was among the worst affected stock markets, with banks such as Macquarie sliding and property trust Centro tumbling more than 70 percent after warning it was having trouble refinancing $1.1 billion in debt.
People are obviously very nervous about the effect the subprime things are having on the funding. Anything with a whiff of U.S. and exposure to funding needs is being hammered, said Eric Betts, head of strategy with Nomura Australia Ltd.
Tokyo's Nikkei ended down 1.7 percent, while MSCI's measure of other Asia Pacific stocks shed 3 percent. The index is about 14 percent below its November 1 record high, but is still up by about a third as the year draws to a close. The gain is roughly the same as MSCI's emerging market index but more than triple the rise for MSCI's main world stock index.
South Korea's KOSPI index shed 3 percent to end at a 3-week low. Taiwan's benchmark index lost 3.5 percent at a 9-months low, while Singapore's Straits Times and Hong Kong's Hang Seng, fell about 2.5 percent each.
Housing data this week and earnings from three of Wall Street's biggest investment banks and brokerage firms, including Goldman Sachs, will keep investors on the edge of their seats.
Oil prices and agricultural commodities are trading near record highs, as is gold, a traditional hedge against inflation.
Crude oil prices rose for the first time in three days, halting a $3 slump caused by fears that the economy of the world's top oil consumer is faltering.
U.S. light, sweet crude for January delivery, which expires on Tuesday, rose 48 cents to $91.75 a barrel.
Spot gold was volatile, rising towards $799 an ounce before slipping to trade around $793 as the stronger dollar capped gains.
The dollar hit a two-month high against a basket of currencies after Friday's strong U.S. inflation data prompted investors to see less chance of a rate cut at the central bank's next meeting in January.
U.S. consumer prices rose the most in more than two years in November.
The CPI data showed that the Fed is walking a fine line between upside inflationary risks and a slowing economy, currency strategists at RBC Capital Markets said in a note to clients.
The dollar traded at 113.06 yen, near the five-week high of 113.60 yen it hit on Friday.
The euro was little changed from late U.S. trade on Friday at $1.4429.
In the Japanese bond market March 10-year futures fell 0.20 of a point to 136.26 by 0223 GMT, while the benchmark 10-year JGB yield rose 2.5 basis points to 1.570 percent, nearing a one-month high of 1.585 percent struck last week.
(Editing by Lincoln Feast)