Asian shares fell and the euro slipped on Tuesday amid fears that Europe's sovereign debt troubles are worsening and could trigger a second full-blown banking crisis.
European stocks tumbled 4 percent on Monday, with financial shares falling to their lowest in more than two years. Wall Street was closed on Monday for a holiday, but S&P 500 futures traded in Asia were down 2.3 percent.
"It's the European disease that is infecting markets all around the world at the moment," said Michael Heffernan, senior client adviser and strategist at Austock Group in Australia.
Adding to the gloom are worries that the United States may be sliding back into recession, a concern heightened by a slew of downbeat data, most recently employment figures that showed the world's top economy failed to create any jobs last month.
Gold, traditionally seen as a safe asset in times of uncertainty, sat just short of $1,900 an ounce, not far off its record high, while the yield on 10-year Japanese government bonds(JGBs), another safe haven, fell below 1 percent.
Tokyo's Nikkei fell 1.2 percent, while MSCI's broadest measure of Asia Pacific shares outside Japan was off 1.1 percent, putting the index more than 18 percent down from its April high.
Hardest hit sectors in the MSCI index were materials and financials. Banks with heavy exposure to Europe were sold, including HSBC, whose Hong Kong listed shares dropped 2.8 percent.
The latest focus of Europe's slow motion crisis is Italy, whose bonds were sold off on Monday on worries that Rome is not doing enough to bring its debt under control. Italian 10-year yields rose near 5.6 percent, their highest since early August.
While European leaders have been able to put together bailout packages for Greece, Ireland and Portugal, investors fear the consequences of a similar crisis engulfing a bigger economy such as Italy or Spain.
The chief executive of Deutsche Bank said on Monday that the euro zone sovereign debt crisis would stunt bank profits for years and could cause the collapse of weaker lenders.
The euro traded around $1.4070, having fallen as low as $1.4060. That helped the dollar index climb above 75.200, its highest in nearly a month.
The European Central Bank, the only major Western central bank to raise interest rates since the 2008-09 financial crisis, meets on Thursday but is expected to leave borrowing costs unchanged at 1.5 percent, which could put the single currency under further pressure.
"Without the support of a more hawkish central bank, the euro will look very vulnerable," Societe Generale strategists Kit Juckes and Sebastien Galy wrote in a note.
JGBs were in demand, as investors retreated from riskier assets, with September 10-year futures up 0.12 point at 142.91, after hitting a 10-month high, while the benchmark 10-year yield fell 1.5 basis points to 0.995 percent.
Brent crude oil rose 0.7 percent $110.82 a barrel, but US crude, whose volume was trimmed by Monday's holiday was down nearly 3 percent, at just below $84.For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.