Global stocks sank Monday after a leading credit ratings agency warned of a deteriorating U.S. financial position and investors fretted over a debt default by bailed-out Greece.
Though Standard & Poor's reaffirmed its triple A rating on the U.S., it downgraded its credit outlook to negative from stable, citing a "material risk" that policymakers won't be able to agree on a plan to deal with the "very large" budget deficit.
"While it has been widely recognized that the U.S. credit rating may have been at some risk of a downgrade for years, S&P's action still comes as a major wake-up call for policymakers, and investors," said Douglas Porter, deputy chief economist at BMO Capital Markets. "This may well prompt more forceful action on the deficit in the next two years, which in turn will act as a more forceful drag on the economic recovery."
The markets were certainly shocked by the announcement and stocks fell sharply.
In Europe, the FTSE 100 index of leading British shares closed down 2.1 percent to 5,870.08 while Germany's DAX slid 2.1 percent to 7,026.85. The CAC-40 in France ended 2.4 percent lower at 3,881.24.
On Wall Street, the Dow Jones industrial average was down 1.7 percent at 12,132 around midday New York time while the broader Standard & Poor's 500 index fell 1.5 percent to 1,299.59.
Stocks in Europe had already been trading lower amid mounting concerns over a possible Greek debt default. In addition, huge election gains for a nationalist euroskeptic party in Finland added to the tensions over Europe's debt crisis. Portugal also began discussions on a financial bailout and Spain had to pay much higher interest rates to borrow in the markets.
The renewed focus on Greece's debts came after suggestions the country would be better off looking for a way to renegotiate its debts
A restructuring would reduce Greece's debt pile and possibly bring a quicker end to the painful austerity measures, but it would entail huge costs to Greece's future ability to borrow money. It also would risk a massive blow to the country's banks, which are big holders of Greek bonds, and hurt many German and French banks too.
There's also fear that a Greek default would motivate Ireland and Portugal to seek a similar way out from their debt stranglehold.
As Greek officials continued to deny that restructuring was an option, Portugal began its quest for its own financial assistance Monday, with the finance minister meeting delegations from the European Commission, the European Central Bank and the International Monetary Fund. A key topic will center on the interest rate charged for Portugal's expected euro80 billion ($114 billion) bailout.
Investors' debt concerns swelled following the news that a euroskeptic party in Finland had made big gains in Sunday's election.
"The victory of the True Finns party in yesterday's general election in Finland will make further bailouts much more difficult to achieve," said Gabriel Stein, an analyst at Lombard Street Research. "Conversely, it makes sovereign defaults far more likely."
The raft of debt crisis news hit the euro hard, though the S&P warning _ perhaps counterintuitively _ helped the dollar post gains. The U.S. currency is often considered a safe haven in times of uncertainty.
By late afternoon London time, the euro was down 1.4 percent at $1.4215, a little above its earlier low of $1.4157.
Earlier in Asia, the main focus was on China's latest monetary tightening in response to figures Friday showing inflation running at a 32-month high in March. On Sunday, the People's Bank of China announced that the deposit reserve ratio for most banks would be raised _ the fourth reserve increase this year.
Beijing's failure to cool prices and growth have frustrated communist leaders who also face mounting foreign pressure to allow China's yuan to rise in value and narrow its swollen trade surplus. Premier Wen Jiabao last week called for authorities to step up the anti-inflation fight.
China's weekend moves weighed on markets across the region.
Japan's Nikkei 225 index fell 0.4 percent to close at 9,556.65, while Hong Kong's Hang Seng dropped 0.7 percent to 23,830.31, and South Korea's Kospi slipped 0.1 percent to 2,137.72.
However, mainland China's Composite Index rose _ 0.2 percent to 3,057.33, its highest close in five months. The smaller Shenzhen Composite Index was up marginally to 1,281.99.
Benchmark crude for May delivery was down $2.80 to $106.87 a barrel in electronic trading on the New York Mercantile Exchange.
Pamela Sampson in Bangkok contributed to this report.