Wall Street closed down for a sixth straight session on Wednesday and stock markets across the world hit six-week lows as slowing factory activity in China and Germany stoked recession fears.
The euro fell to its weakest level since October 6 after Germany suffered one of its least successful debt auctions since the single currency was launched in 1999. It was a dangerous signal that the euro zone's prime safety play, German Bunds, were starting to lose appeal from investor frustration over the lack of new policy measures to halt the bloc's debt crisis.
Commodity prices also fell. Copper futures hit one month-lows in London. In New York, crude oil was headed for its worst week since early October while raw sugar futures sunk to 5-1/2 month lows.
Manufacturing in China shrank at the sharpest pace in 32 months in November, reviving fears of an abrupt slowdown for the world's second-largest economy. In Germany, Europe's manufacturing heavyweight, factory activity contracted for a second straight month, and at a faster rate, as export demand slumped.
As the selling across German bunds deepens with investors questioning the safety of its debt, investors are slowly realizing that yields may lurch higher across the spectrum, creating yet another leg lower for sentiment. Such a negative feedback loop was hardly in the cards, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
Ken Polcari, managing director at ICAP Equities in New York, added: Clearly Europe is continuing to drive the bus -- the market is exhausted. It is tired of the lack of leadership on both sides of the pond, tired of the continuing drama that is playing out ... that no one seems to be paying attention to.
The dollar climbed to a six-week peak against the euro and hit session highs against the yen as investors continued to shun risk and seek safety in the currency of the world's largest economy.
RUSH TO BUY U.S. BONDS
U.S. bond prices rose, reversing early losses in the session, as falling stocks and worries over the debt crisis in Europe fuelled safe-haven buying of U.S. government debt. Bonds initially fell after new U.S. claims for unemployment benefits held below 400,000 for the third straight week, suggesting the labour market was gaining some traction.
The benchmark 10-year U.S. Treasury note shot up 12/32 in price, its yield at 1.88 percent versus Tuesday's close of around 1.93 percent.
The 30-year U.S. Treasury bond traded a point higher in price, with its yield dipping to 2.83 percent, the lowest since October 5, and down from 2.88 percent late Tuesday.
In other U.S. data, durable goods orders excluding transportation, meanwhile, rose 0.7 percent after a downwardly revised 0.6 percent increase in September.
Consumer spending also edged up, by 0.1 percent, although it slowed sharply from a revised 0.7 percent increase in September as households took advantage of the largest increase in income in seven months to rebuild savings.
FEW WANT TO GO HOME LONG
The Dow Jones industrial average <.DJI> slid 236.17 points, or 2.05 percent, to end at 11,257.55. The Standard & Poor's 500 Index <.SPX> lost 26.25 points, or 2.21 percent, to finish at 1,161.79. The Nasdaq Composite Index <.IXIC> fell 61.20 points, or 2.43 percent, to close at 2,460.08.
Trading volumes were light on the eve of the U.S. Thanksgiving holiday.
World stocks, as measured by the MSCI All-Country World Index <.MIWD00000PUS>, tumbled 2.2 percent to their lowest levels since October 6.
The global gauge was down for the eighth straight session, its longest losing run since late July and early August, when the debt crisis, which began in Greece two years ago, spread to Italy. It has lost more than 13 percent this year.
Europe's FTSEurofirst 300 <.FTEU3> fell 1.3 percent.
For the first time since the final week of 2010, there were zero for countable issuance in the investment grade primary bond market, according to IFR, a markets commentary service under Thomson Reuters.
There were potential issuers looking at the market both Monday and Tuesday, but none would pull the trigger in the face of continued global volatility, IFR said.
In the commodity markets, crude oil in New York dropped $1.84, or 1.9 percent, to settle at $96.17 a barrel. Copper futures in London lost 1.3 percent to finish at $7,240 a tonne after tumbling to a one-month low of $7,168.
(Reporting by Barani Krishnan; Additional reporting by Chuck Mikolajczak. Dominic Lau, Brian Gorman, Anirban Nag, Marius Zaharia and William James in London; Editing by Dan Grebler and Jan Paschal)