Safe-haven government bonds and the yen, which tend to rise as investors pare risky trades, gained ground. Commodities, including oil, sagged on nagging fears that slower global growth will hurt demand. European stocks closed at their lowest level in 1-1/2 years on Wednesday, as fears of more mortgage-related write-downs again hit bank shares.
In the United States, all three major stock indexes fell more than 1 percent as disappointing outlooks from technology leaders Apple Inc and Motorola Inc added to recession fears. "When the Fed cuts 75 basis points, stocks are supposed to go up," said T.J. Marta, fixed income strategist at RBC Capital Markets. "That's not happening. There's a lot of dread out there." The Dow Jones industrial average was down 186.15 points, or 1.55 percent, at 11,785.04. The Standard & Poor's 500 Index was down 23.78 points, or 1.81 percent, at 1,286.72. The Nasdaq Composite Index was down 62.46 points, or 2.72 percent, at 2,229.81.
The weak profit outlook from iPod maker Apple helped push the Nasdaq composite index across a bear market threshold in early trading. "The market is pricing in a recession," said Brian Gendreau, investment strategist at ING Investment Management.
Investors believe a lot more needs to be done by the US central bank to shore up the US economy, which some see on the brink of recession, hit by a slumping housing market and tight credit. Markets have priced in a further half-point rate cut at next week's Fed meeting.
EUROPE LOWER: After rising as much as 1.6 percent, the FTSEurofirst 300 index of top European shares closed down 3.22 percent at 1,262.40 points. Worries about profits and bad debt write-downs took a toll on banks such as Societe Generale.
Asian markets managed gains earlier in the global session, with Japan's benchmark Nikkei rising 2 percent. Analysts said the gains in Japan could have been due to the 16 percent decline in the Nikkei this year, which made the index more than due for a rebound.
Commodities were vulnerable as recession fears gripped markets. Copper was down slightly on the London Metal Exchange, while US crude fell more than 2 percent to $87.25 a barrel. "The Fed's move implied that the problems in the system are much worse than we expected," said Eugen Weinberg at Commerzbank in Germany.
BONDS, YEN UP: The recession fears fuelled safe-haven buying of US government bonds, sending US Treasuries higher and pushing the benchmark yield briefly to its lowest level since June 2003.
The benchmark 10-year Treasury note's price traded with a yield of 3.32 percent, down from 3.42 percent late on Tuesday. It was the first dip below 3.4 percent since mid-2003. The 10-year Bund yield slipped to 3.89 percent. Bond yields move inversely to prices.
In the currency market, the dollar shed 1 percent against the yen to 105.59 on the day, while the euro slid 1.5 percent against the yen. Falling stock markets are typically seen as a sign that investors are wary of taking on too much risk. In currency markets, this translates into selling higher-yielding units for low-yielding currencies like the yen.