Fears that talks to reduce the U.S. deficit will collapse added to worries about European debt to push global markets sharply lower on Monday.
A special deficit-reduction supercommittee in Washington was expected to admit failure in its quest to agree on how to improve government finances by $1.2 trillion over the coming decade. The main hurdle in the bipartisan panel's negotiations was how much to raise in new taxes.
The panel's failure would trigger about $1 trillion over nine years in automatic across-the-board spending cuts that some investors fear might not be tuned well enough to sustain growth and create jobs. Analysts say that if Congress tries to dismantle those cuts, it could lead to another downgrade of the U.S. credit rating.
The talks' expected collapse revived market fears that politicians _ whether in the U.S. or Europe _ are often unable to take the decisive action required to reduce debt during a difficult period of economic slowdown.
Spain on Sunday became the third European country in as many weeks _ after Greece and Italy _ to change its government because of discontent generated by the debt crisis. It dumped its ruling Socialists for the conservative leadership of Mariano Rajoy, who inherits an economy wracked by debt and nightmarish unemployment, which at more than 21 percent is the highest among the 17 nations that use the euro.
Rajoy must lower Spain's soaring borrowing costs with deficit-reducing measures while preventing an already moribund economy from heading into a double-dip recession.
The country's borrowing rates fell in early trading on Monday but quickly rose again, with the 10-year bond yield at 6.54 percent. The borrowing rates for other key countries, such as Italy, also increased slightly, though they remained below the key 7 percent threshold that is considered unsustainable over the longer term.
With traders fearing another dismal week of losses, stock markets fell heavily. Britain's FTSE 100 dropped 2.6 percent to close at 5,222.60 while Germany's DAX fell 3.4 percent to 5,606.0 and France's CAC-40 slid 3.4 percent to 2,894.94. The euro lost 0.1 percent to $1.3505.
After Asia mostly closed lower, Wall Street also dropped sharply. The Dow Jones industrial average fell 2.6 percent to 11,487.71 while the S&P 500 lost 2.4 percent to 1,186.49.
Sentiment was not helped by the European Central Bank's announcement that last week it stepped up its program to buy the government bonds of financially weak countries like Italy to keep their borrowing rates down.
The ECB said Monday it had bought euro7.99 billion, up from euro4.48 billion the previous week, during the days when Italy's key borrowing rate threatened to rise well above 7 percent.
While the increased purchases will have helped keep market pressures at bay, experts say such sums are not enough. Many governments would like the ECB to step up the bond purchases massively, but Germany is against such a move, saying austerity measures are the only sustainable way to alleviate the debt market turmoil.
As an alternative to massive ECB bond-buying, some suggest that eurobonds _ debt issued jointly by all euro nations _ would be a key tool in calming the crisis. The European Commission will issue a report on Wednesday favoring such a solution, which is also strictly opposed by Germany, which worries about exposing its taxpayers to the bad debt of profligate countries.
In Asia, the Nikkei 225 index in Tokyo fell 0.3 percent to end at 8,348.27, its lowest closing since March 2009. Hong Kong's Hang Seng fell 1.4 percent to 18,225.85 and South Korea's Kospi dropped 1 percent to 1,820.03.
Australia's S&P/ASX 200 fell 0.3 percent to 4,163. Mainland Chinese shares fell slightly, with the benchmark Shanghai Composite Index inching down less than 0.1 percent to 2,415.13, its lowest close in almost one month.
Stocks that are heavily dependent on exports to the West have come under pressure recently, said Linus Yip of Hong Kong-based First Shanghai Securities. "The market right now is still worried about future economic growth, the European debt problem," Yip said.
Chinese Vice Premier Wang Qishan, who oversees trade and finance, said this weekend that the global economic situation is "extremely serious" and predicted the malaise is likely to be long term, state media reported.
In Tokyo trade, Mazda Motor Corp. lost 5.1 percent and Panasonic Corp. lost 2 percent. South Korea's LG Chem Ltd., which makes batteries for cars, lost 4.3 percent.
Benchmark crude for December delivery was down $2.36 at $95.31 a barrel in electronic trading on the New York Mercantile Exchange on Monday. The contract fell $1.41 to finish at $97.41 per barrel on the Nymex on Friday.
Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.
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