Markets extend falls despite Obama reassurancesContinue reading the main story
Last Updated at 16:32 ET
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The main US share index, the Dow Jones, has plummeted 5.6%, despite US President Barack Obama moving to try to reassure investors.
In points terms, the Dow ended down 635 to 10,810, its biggest one-day decline since October 2008, and the sixth largest on record.
However, President Obama said markets continued to regard US government debt as being the highest possible grade.
It was his first public reaction to Standard & Poor's downgrade of the US.'Recession fear'
Despite Mr Obama's comments, the Nasdaq index fell even further, losing 6.9%. The S&P's 500 index also saw a sharp decline, falling 6.7%, its biggest drop since December 2008.
Prior to Mr Obama's speech, the Dow had only been 2.5% lower.
The biggest fallers on the index included aluminium giant Alcoa, down 12%, and bank JP Morgan Chase, which gave up 9.4%.
Bank of America saw the largest fall, dropping 21%. However, analysts said this was primarily due to it being hit by a $10bn (£6.1bn) lawsuit from insurance group AIG.
Earlier, the UK's FTSE ended down 3.4%.
That represented a decline of 178 points for the UK's main share index. It marked the first time in the FTSE 100's 27-year history that it had fallen by more than 100 points for four sessions in a row.
Share indexes also fell heavily across Europe, with Germany's Dax ending down 5%, while France's Cac lost 4.7%.
Analysts suggest that further austerity measures, which will be needed to tackle high levels of debt in the US and some eurozone countries, could stifle their already weak economic recovery.
"The sell-off is mainly due to the fear that we [the US] will relapse into recession," said Klaus Wiener, chief economist at Generali Investments.
These fears were were also reflected in the price of gold and oil.
Gold, seen as a safe investment in times of economic uncertainty, jumped to a new record high of $1,697 an ounce.
Meanwhile, the price of oil slipped further, reflecting concerns that weak global growth could lead to a fall in demand.
US light crude ended down $5.57 to $81.31 a barrel, its lowest closing position since November of last year. Brent crude fell $5.63 to $103.74 a barrel.'Renewed urgency'
Standard & Poor's downgraded US government debt from AAA to AA+ on Friday.
Speaking on Monday, Mr Obama said: "Markets will rise and fall. But this is the United States of America.
"No matter what some agency may say, we've always been and always will be a triple-A country."
Europe faces a stark choice: to force some of the weaker countries out of the eurozone or for the stronger countries to assume responsibility for the bloc's debts as a whole.”
Mr Obama said he hoped the downgrade would give US politicians "a renewed sense of urgency" in the need to tackle the US deficit and debt.
He called on both Republicans and Democrats on Capitol Hill to avoid party-political positioning over the issue.
"It is not a lack of plans or policies that is the problem," he said.
"It is a lack of political will in Washington, an insistence on drawing lines in the sand. That is what we need to change."
Mr Obama said he would now be putting forward a new plan, including higher taxes for the biggest earners, and reduced spending on Medicare.'More volatility'
Earlier, yields on Spanish and Italian bonds fell sharply after the European Central Bank (ECB) intervened to try to stop the eurozone debt crisis spreading.
The ECB's announcement that it intended to buy up government bonds saw the yield on Spanish 10-year bonds fall from more than 6% to about 5.2% - an indication that investors think it is less risky to lend Spain money. Yields on Italian bonds fell by a similar amount.
Bonds are essentially IOUs issued by governments, or companies, to raise cash. Governments issue new bonds to help pay maturing bonds, which is why it is so important that investors continue to buy them - if they do not, governments are unable to pay their outstanding debts.
Despite the fall in Spanish and Italian bond yields, Richard Hunter at broker Hargreaves Lansdown said investors would like to see more being done.
"The markets are looking for a concrete plan out of Europe and the US in terms of how they are going to deal with their deficits," he said.
Many will see the ECB as taking a serious credit risk in bailing out two financially over-stretched governments and as behaving contrary to the rules of prudent central banking”
"Until the market can get comfort on these matters, there is going to be more volatility."
On Friday, Italian Prime Minister Silvio Berlusconi announced plans to balance the country's budget by 2013, a year earlier than planned, while Spain has also promised to speed up cost-saving measures.
Yet David Jones, an analyst at financial spread betting firm IG Index, told the BBC that investors would remain unconvinced, despite the various attempts by leaders and international authorities to reassure the markets.
"It hasn't changed the feeling that politicians both in Europe and in the US are always a few steps behind where the crisis is," he said.
"It is a lack of confidence. Markets still think there is a lot of talk from politicians but not much action.
"They are reacting to the crisis rather than putting anything proactive in place. The political issue is a major reason why the markets have been so weak over the past week."