Asian shares hit a six-week low on Thursday and safe-haven Japanese bond futures rose to their highest since Lehman Brothers collapsed in September as a U.S. banking crisis deepened, sparking fears of prolonged financial turmoil.
Bank of America Corp and Citigroup Inc shares plunged on Wednesday as investors questioned whether the firms have enough capital to cover losses from toxic assets.
The market turbulence is an another blow to major economies that are facing the toughest conditions in decades as evidenced by the latest data out of the United States, Germany and Japan.
The European Central Bank is expected to slash interest rates later in the day, though uncertainty about how deep a cut to expect helped send the euro to multi-week lows on Wednesday.
"A continued flow of bad economic data is pointing to steeper global recession, worsening concerns about corporate earnings," said Lee Sun-yeob, a market analyst at Goodmorning Shinhan Securities in Seoul.
"Increasingly bearish prospects for global banks' results are also pressuring sentiment."
The MSCI index of Asia-Pacific shares excluding Japan dropped 5 percent as of 0515 GMT (12:15 a.m. EST), heading to its biggest percentage daily fall since mid-November.
The last time worries about Citigroup's fate undermined global equity markets was in November, when the U.S. government stepped in to prop up the lender with government funds.
The MSCI index on Thursday hit its lowest since December 8, down almost 9 percent for the year. The deep falls over the past week and a half are rapidly denting a rally that still has shares up about 17 percent since hitting five-year lows in November.
Policymakers worldwide have responded since late last year by slashing interest rates and boosting spending, but the actions have yet to fully convince investors.
Among the latest factors worrying investors were data on Wednesday showing December U.S. retail sales tumbled and Germany's economic growth slipped to a three-year low in 2008.
In Japan, core machinery orders fell by a record amount in November, data showed on Thursday.
"The problems are global and there isn't any real good news around," said Martin Angel, a dealer at Patersons Securities Ltd. in Australia. "You are just not going to escape it."
Japan's Nikkei average dropped 4.5 percent, with Nissan Motor Co slipping 3.4 percent on news it will post an annual operating loss because of sliding sales and a soaring yen.
