Economic gloom returned to financial markets with a vengeance on Thursday with warnings about further declines in demand and production hitting equities and boosting bonds. Japan's yen rose strongly as investors began repatriating money toward the end of the business year. World Bank President Robert Zoellick told Britain's Daily Mail newspaper that the global economy was set to fall 1 to 2 percent this year. China, meanwhile, said industrial growth had slowed to a record low pace and Japan reported rising inventories, signaling more production and job cuts ahead. This followed the release of Reuters polls on Wednesday which showed economists expecting the grip of global recession to remain tight well into next year. "Investors are quite skeptical now," said Albert Hung, chief investment officer at Alleron Investment Management in Australia. "The economy is still in very poor shape and there are no clear signs of recovery yet." The economic worries halted this week's tentative equity rally, which has put the MSCI all-country world stock index .MIWD00000PUS up around 4 percent for the week. The pan-European FTSEurofirst 300 .FTEU3 index of top European shares was down 1.5 percent. Earlier, Japanese stocks fell sharply. The benchmark Nikkei .N225 lost 2.4 percent to 7,198.25, eating away at Wednesday's 4.6 percent gain -- the biggest one-day gain in six weeks. The broader TOPIX finished down 3 percent at 700.93, its lowest close since December 1983. REPATRIATING YEN The yen rallied broadly, rising more than one percent against the dollar and euro, as Japanese investors repatriated funds and short-term speculators bought yen. Japanese investors typically bring home funds to window dress their books before the end of the business year in March. The dollar fell as low as 95.79 yen, its weakest in two weeks. It was last down 1.3 percent at 95.86 yen. Elsewhere, the dollar recovered as a recent run in risk appetite lost steam, with the euro and sterling both down against the dollar.

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