Markets suffer largest one day falls in over two years

European equities plummeted the most in more than two years today as US economic data missed forecasts and Swedish regulators warned that lenders are unprepared for a freeze in money markets.

German shares lost most, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe and intensifying worries about politicians' lack of a plan to address the euro zone sovereign debt crisis.

On Wall Street, the three major US stock indexes lost 4 per cent to 5 per cent. Global stocks, as measured by MSCI's all-country world equity index, tumbled 4.4 per cent.

The European banking sector, exposed to the euro zone debt crisis, fell 6.6 per cent and is down 29.7 per cent this year. Heavyweight fallers included Barclays and Societe Generale, both down 11.6 per cent. Germany's Commerzbank fell 10.5 per cent.

The FTSEurofirst 300 index of top European shares ended the session provisionally 4.9 per cent lower at 923.85 points, the biggest fall since March 2009.

The Stoxx Europe 600 Index plunged 4.8 per cent to 226.7 at the close in London, the biggest drop since March 2009, as only four stocks gained.

"The market is beginning to price in a recession," Michael Hewson, market analyst at CMC Markets, said.

"And until we get some clear idea of how policymakers are going to deal with euro zone sovereign debt problems, it's not getting to get any better."

Benchmark indexes fell in all of the 18 markets in western Europe as the UK's FTSE 100 dropped 4.5 per cent and the German DAX lost 5.8 per cent, the most since 2008. Sweden's OMX 30 declined the most of any European market, sinking 6.7 per cent.

The Dow Jones industrial average was down 477.72 points, or 4.19 percent, at 10,932.49. The Standard & Poor's 500 Index was down 59.03 points, or 4.94 percent, at 1,134.86. The Nasdaq Composite Index was down 140.27 points, or 5.59 percent, at 2,371.21.

A report today showed US initial jobless-benefit claims climbed by 9,000 to 408,000 in the week ended August 13th, the highest in a month. Economists surveyed by Bloomberg had projected 400,000 claims, according to the median forecast.

The VStoxx Index, which measures the cost of protecting against a decline in shares on the Euro Stoxx 50 Index, jumped 35 per cent, the most since May 2010.

Morgan Stanley cut its forecast for global growth this year, citing an "insufficient" policy response to Europe's debt crisis, weakened confidence and the prospect of fiscal tightening. The bank now estimates expansion of 3.9 per cent, down from a previous forecast of 4.2 per cent.

The Wall Street Journal reported today that US regulators are stepping up scrutiny of local operations for Europe's largest banks on concern that the sovereign debt crisis may lead to funding problems.

The Federal Reserve Bank of New York has been holding talks with the lenders and sought information about their access to funds to maintain operations in the US, the newspaper said, citing people it didn't identify.

Dexia, Belgium's biggest lender, tumbled 14 per cent to €1.57 today, leading a gauge of banks in the Stoxx 600 to a two-year low. Societe Generale, France's second-largest lender, dropped 12 per cent to €21.60, the lowest since March 2009. HSBC Holdings, Europe's biggest bank by market value, declined 6 per cent to 509.6 pence.

Swedbank AB retreated 9 per cent to 83.55 kronor in Stockholm, the largest decline in two years. Nordea Bank AB, Sweden's biggest bank, fell 7.4 per cent to 54.70 kronor.

Swedish banks must do more to prepare for a deterioration in Europe's debt crisis that could freeze interbank markets and cut off funding, said Lars Frisell, chief economist at the country's financial regulator.

"It won't take much for the interbank market to collapse," Mr Frisell said yesterday in an interview in Stockholm. "It's not that serious at the moment but it feels like it could very easily become that way and that everything will freeze."

German chancellor Angela Merkel repeated today that joint European bonds are "not the right answer" to the euro area's debt crisis. Ms Merkel made the comment at a rally of her Christian Democratic Union party today in n the German region of Mecklenburg-Western Pomerania, which holds state elections next month.

Additional reporting: Reuters/Bloomberg