WASHINGTON U.S. and European stocks fell to their lowest levels in 5-1/2 years on Wednesday, as prospects faded for a Washington bailout of the auto industry and data showed U.S. consumer prices dropped at a record pace in October.
Stock prices were also hit also by Federal Reserve forecasts for the U.S. economy to contract in the first half of through 2009, amid concern about the potential for deflation.
U.S. consumer prices plummeted 1.0 percent last month, raising the prospect of deflation if consumer demand fails to pick up. Construction starts on U.S. homes also hit a record low in October, reports showed.
The Dow Jones industrial average dropped 5.07 percent to close below 8,000 for the first time since March 2003, while the S&P 500 Index and NASDAQ Composite each plunged more than 6.0 percent.
"We're witnessing the worst market crash in most people's lifetimes," said David Bianco, chief U.S. equity strategist at UBS in New York. "People seem to enjoy telling each other how bad its going to get and working themselves into a frenzy. It's just becoming silly."
Falling bank stocks and lower commodity prices dragged European shares to their lowest close in 5-1/2 years, and Japanese stocks were hit by concerns about exports and the auto industry.
The U.S. Federal Reserve also released minutes of their October policy meeting showing some Fed officials believed even deeper interest rates cuts may be needed if growth slows further.
"Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings," the minutes of the October 28-29 meeting said.
Earlier, minutes of the Bank of England's last meeting, when it cut interest rates by a sharp 1.5 percentage points, showed it had considered an even bigger reduction to tackle the recession and raised bets on further cuts ahead.
Fund managers are embracing defensive assets such as utility stocks, government bonds and cash. U.S. and European debt prices rose on signs of fading inflation.
Investors sold off Latin American currencies, stocks and bonds, taking their money to safer havens on fears of more global weakness.
Bonds backed by U.S. commercial real estate loans fell for a second day on fear the fast-weakening U.S. economy could lead to a wave of defaults on loans on properties such as office buildings, retail stores and hotels.
PLEADING WITH CONGRESS
The "Big Three" U.S. carmakers -- General Motors, Ford Motor Co and Chrysler LLC -- pleaded for help before the U.S. Senate Banking Committee for a second day.
The executives faced stiff opposition from some Republicans and the White House as they made their case for a $25 billion aid package.
Lawmakers had said earlier they thought the chances of a bill were remote, but Senate Majority Leader Harry Reid said on Wednesday evening that members of the chamber from both parties were trying to come up with a compromise bill.
"We'll work to see what we can get done in the next 12 hours," he said, before Congress adjourns for the year.
Some analysts said it would be better to force the Detroit automakers into bankruptcy so they could reorganize, rather than pump in more money. At one point, GM shares dropped more than 16 percent to a 66-year low.
Car companies in Japan and Europe are also under pressure.
Toyota said it would stop production at U.S. and Canadian factories for two extra days next month and Nissan warned of more tough times ahead.
ECONOMY BITES CORPORATIONS WORLDWIDE
Investors' concerns extended well beyond the automakers.
BASF, the world's largest chemicals maker by revenue, cut its 2008 profit outlook and announced cutbacks in production, citing a "massive" fall in demand.
Japan's third-largest bank, Sumitomo Mitsui Financial Group, followed its larger peers by planning to raise at least $2.9 billion through preferred securities to beef up a capital base rocked by rising bad loans.
Oilfield services giant Halliburton Co said it will struggle in 2009 to meet its long-term goal of increasing revenue by 20 percent annually.
U.S. grain and soybean futures prices eased with other commodities on concerns about a deepening global recession. Oil prices dropped to 22-month lows as U.S. inventories rose and demand weakened due to the economic slowdown.
Authorities worldwide have recapitalized banks, thrown massive funds into frozen money markets and acted to revive their economies at a cost approaching $5 trillion.
German Economy Minister Michael Glos said the EU's executive arm will unveil a stimulus package worth $164 billion next week.
Russia's central bank said it had sold $57.5 billion of its reserves in the last two months to defend the ruble and contributed $14 billion to a bank bailout plan.
The four Nordic countries agreed on a $2.5 billion loan for Iceland, where three top banks failed.
"Monetary policy boring? Clearly not any more," said Marc Ostwald, bond analyst at Monument Securities in London.
(Editing by Dan Grebler)