The US S&P 500 index sank below the psychologically significant 800 level, European stocks fell to six-year lows and the Topix share index in Japan closed at its worst for a quarter of a century as gold broke above $1,000 an ounce and the dollar touched a three-month high against the euro.
Garry Evans, strategist at HSBC, said: "Equity markets continue to be held back by worries about structural vulnerabilities in the global economy."
He noted that market attention had focused heavily this week on central and eastern Europe (CEE) amid fears that borrowers in the region would struggle to repay debt owed to foreign banks.
Moody's Investors Service warned that the recession in CEE economies would be more severe than elsewhere and that western banks with subsidiaries in the region risked ratings downgrades.
"This issue highlights two of the biggest risks on investors' minds: the lack of solvency of big international banks, and the structural weaknesses in some emerging markets," Mr Evans said.
"These jitters have begun to affect Asia too. Credit default swap rates have started to rise again, with Korea this week hitting a three-month high – higher than the Philippines – and even China rising."
While CEE dominated newsflow in emerging markets this week, there were plenty of grim reports from developed economies for investors to absorb.
Investors were shocked by the deterioration in Japan as figures showed GDP falling by an annualised 12.7 per cent in the last three months of 2008 – the steepest drop since the oil crisis of 1974.
In the US, labour market concerns were heightened by news that continued claims for jobless benefit had hit a record high, while the eurozone composite purchasing managers' index fell to the lowest level on record.
There was a broad lack of enthusiasm from the markets for the latest global stimulus measures.
Dean Maki of Barclays Capital said: "Policymakers have been busy trying to arrest the global downturn in recent months, but the challenge they face keeps getting larger."
In the US, President Barack Obama's $787bn fiscal package was followed up with plans to help struggling homeowners.
In the UK, the minutes of the Bank of England's most recent policy meeting showed a unanimous vote in favour of buying government and other securities – so-called "quantitative easing" – which analysts believe could provide a powerful boost to the economy.
The Bank of Japan unveiled plans to buy up to Y1,000bn ($10.7bn) of corporate bonds.
But equity markets weakened across the board.
In the US, the Dow Jones Industrial Average dipped to a six-year low while the S&P 500 was on track for a weekly fall of 6.5 per cent and within striking distance of last November's bear market lows.
Financials bore the brunt of the sell-off amid mounting fears that the government would be forced to nationalise a leading bank.
European banks also suffered and the FTSE Eurofirst 300 recorded a weekly fall of 7.3 per cent as it touched its lowest since March 2003.
In Tokyo, the Nikkei 225 Average fell 4.7 per cent and the Topix shed 3.3 per cent.
The MSCI Emerging Markets index dropped 8.5 per cent – its worst week since November.
The weaker tone in equities prompted a steep widening of credit spreads, particularly for banks. The investment-grade Markit iTraxx Europe index widened 20 basis points over the week to 174bp while the Crossover index – a closely watched barometer of risk aversion – briefly hit a record wide of 1,120 basis points before easing back to 1,085bp, up 15bp.
In the worsening risk environment government bonds pushed higher over the week in spite of persistent concerns about supply.
The 10-year US Treasury yield fell 15bp to 2.75 per cent as investors brushed off a slightly higher than expected core inflation reading on Friday.
Germany's 10-year Bund yield dropped 12bp to 3.01 per cent and the 10-year UK Gilt yield dropped 13bp to 3.42 per cent.
The clear winner in the currency markets this week was the dollar as the safe-haven status of the yen was called into question by Japan's worsening economic backdrop. The dollar hit a six-week high against the Japanese currency and touched its best level against the euro for three months.
In commodities, gold stood out as it touched an 11-month high of $1,005.40 – a rise of 6.8 per cent over the week.
But the heightened worries about global growth put other prices under pressure, with the Reuters-Jefferies/CRB commodities index hitting a 6½-year low.
Articled by Dave Shellock (ft.com)
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