In a classic flight from risky assets, the U.S. 10-year Treasury yield hit its lowest in more than five decades while sterling hit record lows against the euro and on a trade-weighted basis.
The Dow Jones industrial average Thursday fell 196.33 points, or 2.2 percent, to 8,565.09. Futures pointed to a sell-off Friday on Wall Street. Dow futures were down 286 points, or 3.3 percent, at 8,311 and S&P 500 futures slid 37.30 points, or 4.3 percent, to 837.20.
The U.S. Senate failed to reach a last-ditch compromise to bail out automakers on Thursday, effectively killing any chance of congressional action this year which many say is necessary to prevent a further downturn in the already contracting economy.
"The failure of the auto bill has caused a turbulent session in Asia ... and there is a flight back into safe haven assets," said Investec's chief economist Philip Shaw. MSCI world equity index fell 1.8 percent, having hit a one-month high on Thursday. The FTSEurofirst 300 index of leading European shares lost 3.6 percent. Asian shares were down 5.6 percent.
Hopes for the U.S. auto industry now appear to rest with President George W. Bush agreeing to tap a $700 billion Wall Street bailout fund for emergency aid. General Motors Corp. and Chrysler LLC have said they could be weeks from collapse. Ford Motor Co. says it does not need federal help now, but its survival is far from certain.
The bankruptcy of any American automaker would deal another major blow to the American economy, already in recession, and ripple through export-dependent Asia, as well as global financial markets.
"If a company such as General Motors filed for Chapter 11 bankruptcy protection it could strike the Dow below 8,000 again," said Jackson Wong, investment manager at Tanrich Securities in Hong Kong.
Grim data
There was also more grim jobs data from the United States with new unemployment benefit applications in the week ending Dec. 6 rising to a seasonally adjusted 573,000 from an upwardly revised figure of 515,000 in the previous week. The reading was the highest since November 1982, though the labor force has grown by about half since then.
News that Bank of America would cut up to 35,000 jobs and U.K. bank HBOS took a hit of more than $11 billion on bad debts and other charges this year, and a warning from JP Morgan on fourth-quarter performance, hit the banking sector, the epicenter of the credit crisis which began in August 2007.
Bank of America, HBOS and JP Morgan shares fell 9 percent in Europe. JP Morgan's chief executive Jamie Dimon said Thursday the bank has had a "terrible" November and December. U.S. crude oil fell 5 percent to $45.57 a barrel as concerns grew over energy demand in the slowing global economy.
In Asia, the benchmark 10-year U.S. Treasury yield fell as low as 2.48 percent, its lowest in more than five decades, as capital chased safer government bonds.
The December Bund futures rose 91 ticks.
"Who pressed the self destruct?" French bank Calyon said in a note to clients. "If an automaker does fold this could have a severe impact on the labor market amongst other things."
The low-yielding yen rose as high as around 88.40 per dollar according to Reuters data. Sterling hit record lows against the euro and on a trade-weighted basis. It fell to 89.29 pence per euro.
The dollar rose 0.3 percent against a basket of major currencies.
The past week of gains in world markets was "more predicated on hope than reality," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore.
"This has been a typical bear market rally. It's been based on very high expectations of Obama's fiscal stimulus plan. It's been based on expectations and nothing else," he said.
President-elect Barack Obama last weekend flagged a massive stimulus package for the U.S. economy once he takes office in late January, pledging the largest public works program since the creation of the U.S. interstate highway network a half-century ago.
A $14bn (£9.4bn) bail-out deal for the US car industry has failed to get Senate support, raising fears of job cuts and a possible industry collapse.
Bipartisan talks on the rescue plan collapsed over Republican demands that the United Auto Workers (UAW) union agree to swift wage cuts.
The White House said the plan was American carmakers' "best chance to avoid a disorderly bankruptcy".
Shares fell sharply around the world on the news.
Japan's Nikkei share index fell 484.68 points, or 5.6%, to 8253.87, with carmakers among the hardest hit. Shares in Toyota, Honda and Nissan all fell by at least 10%. erman, French and UK stocks all opened lower on the news, with the FTSE-100 index of leading shares down 176.3 points at 4,211 at midday.
Some Democrats have now called on President Bush to use some of the $700bn bail-out earmarked for Wall Street to help the car industry.
Tense and emotional
The Republicans left the closed-door meetings after the UAW union refused to cut wages next year to bring them into line with their Japanese counterparts. UAW's current contract with the car makers expires in 2011.
"We were about three words away from a deal," said Republican Sen Bob Corker. "We solved everything substantively and about three words keep us from reaching a conclusion."
Alan Reuther, the UAW's legislative director, declined to comment to reporters as he left a meeting room during the negotiations, according to the Associated Press.
The BBC's Andy Gallacher in Washington says it was always going to be a battle to get the US Senate to approve the $14bn bridging loan.
With a majority of just one in the Senate, the Democrats needed some Republicans to back the bill as some in their own party were expected to vote against it.
The atmosphere in the Senate was tense and at times emotional, our correspondent says, as the Democrats made last-minute pleas to get their Republican counterparts to vote in favour of helping America's biggest car domestic makers, Ford, Chrysler and General Motors.
Millions affected
The three companies employ 250,000 people directly and the failure of the bail-out raises the prospect of huge job losses.
The Senate majority leader, Harry Reid, said he was "terribly disappointed" when it became clear the vote had collapsed, calling it "a loss for the country".
"Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."
"We think the legislation we negotiated provided an opportunity to use funds already appropriated for automakers and presented the best chance to avoid a disorderly bankruptcy while ensuring taxpayer funds only go to firms whose stakeholders were prepared to make difficult decisions to become viable," he said.
Some Democrat politicians have called on President Bush to use some of the $700bn bail-out for Wall Street to help the car industry.
Help needed
The deal would have given the Big Three carmakers access to emergency funding to help them cope with the sharp downturn in sales because of the global financial crisis.
General Motors and Chrysler have said they risk ruin without immediate aid. Ford says it may need funds in the future.
The bosses of the three firms had previously asked for $34bn from Congress.
