Global stocks slumped on Wednesday as the appetite for risk evaporated, with worries about Europe's debt problems coming to the fore in the face of rumors about possible trouble at French banks and continuing fear of another U.S. recession.
French banks led European markets lower as Societe Generale plummeted nearly 20 percent and BNP Paribas dove almost 13 percent. The European banking index fared somewhat better, down 6.6 percent.
A Societe Generale spokeswoman denied all market rumors about the bank.
"France owns $350 billion worth of Italy's debt on their banks' books," said Dave Rovelli managing director of U.S. equity trading at Canaccord Adams, who added that fears of a failure in the sector was hitting U.S. markets.
Wall Street and European shares tumbled close to 4 percent following two days of extreme volatility that included, on Monday, the sharpest drop in nearly three years. The euro dropped more than 1 percent against the U.S. dollar.
Speculation that France's triple-A rating may be at risk rattled markets, though the three major agencies reaffirmed the top-tier rating. The jitters come after the U.S. lost its prized triple-A status last week.
The turnaround in equities followed a morning of gains in Europe and Asia that were prompted by the U.S. Federal Reserve's dovish promise on Tuesday that it would keep interest rates near zero through at least mid-2013.
The Fed's unprecedented commitment was double-edged. It sent the message to markets that the central bank is willing to keep things afloat, but it also acknowledges how much the U.S. economy has weakened.
"At this point of time, investors' heads are spinning," said Oliver Pursche, president at Gary Goldberg Financial Services in Suffern, N.Y. "We anticipate further volatility. I even think we are going to retest the lows that were set on Monday."
The Dow Jones Industrial Average dropped 411.98 points, or 3.67 percent, to 10,827.79. The Standard & Poor's 500 Index shed 42.85 points, or 3.65 percent, to 1,129.68. The Nasdaq Composite Index fell 85.68 points, or 3.45 percent, to 2,396.84.
The MSCI all-country world index, which has fallen as much as 20 percent from a May high, was down 2.4 percent after earlier gains.
The euro last traded down 0.9 percent at $1.4235, after sliding to a session low of $1.42080 on trading platform EBS. It also lost 1.8 percent to 108.83 yen.
Switzerland's central bank, meanwhile, said it was expanding measures to fight against the Swiss franc's strength. Investors have been pouring into the currency as a safe haven during recent market and economic weakness.
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