US stocks plummeted for the second straight session today despite a speech in which President Obama attempted to reassure investors.
In his first comments on the downgrade in the United States' credit rating, Mr Obama blamed the move on political gridlock in Washington and said he would offer some recommendations on how to reduce federal deficits.
Yet despite his comments, the S&P 500 and the Nasdaq are down 6 per cent in the first session since Standard & Poor's cut the nation's AAA credit rating on Friday.
The downgrade - the first in the country's history - reflected investors' rising fear about the economic outlook and Washington's ability to meet the challenges.
Today's huge sell-off extended the losses in the previous week, which was Wall Street's worst in more than two years.
The S&P 500 is down 17 per cent from its 2011 closing high, reached on April 29 - putting the benchmark index close to the 20 per cent decline from a recent peak that Wall Street defines as bear market territory.
European stocks fell to their lowest level since August 2009 today as Standard and Poor's US downgrade overshadowed the ECB’s purchase of Spanish and Italian government bonds.
Mining companies, carmakers and technology firms paced the selloff amid concern that the lowering of America's credit rating will exacerbate the economic slowdown.
Mr Obama said that he hopes the Standard and Poor's downgrade of US debt to AA-plus from AAA will give lawmakers a new sense of urgency to tackle deficit spending and said he did not believe the reductions could be carried out with spending cuts alone.
A congressional committee, to be formed under the legislation passed last week that averted a government default, is to report its recommendations in late November on how to cut $1.5 trillion in spending over a decade.
Mr Obama said he would offer his own recommendations for fixing the problem and cited again the need to raise taxes on wealthier Americans and make modest adjustments to popular but expensive entitlement programs.
Mr Obama made his comments on a day when most European shares began in negative territory and while some markets rallied briefly, nearly all major indices retreated again shortly after. The European trend was quickly followed by the US.
The Dow Jones industrial average sank 525.78 points, or 4.59 per cent, to 10,918.83. The Standard & Poor's 500 Index dropped 70.30 points, or 5.86 per cent, to 1,129.08. The Nasdaq Composite Index lost 149.66 points, or 5.91 per cent, to 2,382.75.
Reflecting the extent of fear and the selling. about 98 per cent of the issues traded on the New York Stock Exchange were in negative territory. Decliners outnumbered advances on the NYSE by nearly 60 to 1. On the Nasdaq, about 92 per cent of the stocks traded were in the red. Nearly 15 Nasdaq stocks fell for every one that rose.
While all 10 S&P sectors fell more than 2 per cent, the groups most sensitive to the economy, such as banking and commodities, were the hardest hit. The S&P financial index lost 8.3 per cent while the S&P energy index lost shed 6.9 per cent. US crude oil futures slid 6.1 per cent, or $5.31, to $81.57 a barrel.
The benchmark Stoxx Europe 600 Index dropped 4.1 per cent to 228.98 at the close in London, for its biggest retreat since March 2009. The gauge tumbled 9.9 per cent last week and has now fallen 21 per cent from this year's high in February.
National benchmark indexes retreated in all 18 western European markets. At the close, the Iseq index of Irish shares was down 4.42 per cent while the FTSE 100 in London fell.
Yields on Irish bonds were lower with the 10-year yield down to 9.96 per cent after the ECB began buying €2 billion worth of Spanish and Italian bonds. The euro fell against the US dollar after gaining on the euro initially on the ECB action.
Investors continued to seek safe haven in gold which vaulted above $1,700 an ounce for the first time today, after the respective pledges by the G7 and the European Central Bank to quell the turbulence in the financial markets did nothing to put investors at ease.
Tokyo's Nikkei closed down 2.2 per cent and MSCI's broadest index of Asia Pacific shares outside Japan fell 4.2 per cent, taking its losses for the month so far to more than 12 per cent.
Investors were seemingly unimpressed by weekend talks between industrialised countries aimed at safeguarding the smooth functioning of financial markets following S&P's move to downgrade the US government long term rating to AA-plus from AAA.
Moody's repeated a warning today it could downgrade the United States before 2013 if the fiscal or economic outlook weakened significantly, but said it saw the potential for a new deal in Washington to cut the budget deficit before then.
Earlier today, the G20 issued a statement today pledging to take "all necessary measures to support financial stability, growth and liquidity in a co-ordinated manner...We will remain in close contact through the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets."
While the loss of the prized AAA credit rating the United States has held with S&P since 1941 was a huge symbolic blow, the crisis in the euro zone has presented an even bigger immediate concern for investors.
Yields on Italian and Spanish debt soared to 14-year highs last week on political wrangling and doubts over the vigour of budget cuts, raising fears that the euro zone's bailout fund for struggling members could be overwhelmed.
In a statement last night, the ECB said it welcomed announcements by Spain and Italy on new fiscal and structural policy measures, and it urged both governments to roll them out swiftly.
Additional reporting: Reuters