| NEW YORK
NEW YORK Renewed jitters over Europe's debt crisis and a raft of weak U.S. economic data sparked a rout in global equities on Thursday while driving skittish investors to the safety of gold and U.S. government bonds.
Spot gold prices and the yield on benchmark U.S., British and German 10-year government debt set fresh records as investors dumped stocks and other riskier assets to rush into safe-haven investments for their perceived security.
The numbers spelled mayhem -- the Dow lost more than 400 points and declining shares on the New York Stock Exchange outpaced advancing stocks by more than 16 to 1 -- but major indexes managed to stay above 2011 lows set last week.
"It's much of the same -- concerns over European banks, U.S. deficits weighing on economic growth and the possibility of a global recession as the end result," said Chris Jarvis, senior analyst for Caprock Risk Management in Hampton Falls, New Hampshire.
"These cross currents are driving wild swings for riskier asset classes such as equities and commodities, specifically crude oil. Until clarity improves, we expect volatility to remain elevated relative to historical norms."
A drop in factory activity in the U.S. Mid-Atlantic region to the lowest level since March 2009 unnerved investors, as the data from the Philadelphia Federal Reserve Bank is viewed as a forward-looking indicator of national manufacturing.
An unexpected fall in existing U.S. home sales in July and a greater-than-expected rise in new claims for jobless benefits in the latest week added to growing fears that the U.S. economic recovery could stall and slide into recession.
Investors reacted by avoiding risk. Corporate bonds, industrial commodities and higher-yielding currencies slid, and assets viewed as safe havens, such as gold, government bonds and the dollar, gained.
European equities suffered their biggest daily slide in 2-1/2 years. The FTSEurofirst 300 index of leading European shares fell 4.8 percent to close at 925.19 points, its biggest one-day percentage drop since March 2009.
"The market is beginning to price in a recession. The Philadelphia Fed number was an absolute abomination," said Michael Hewson, market analyst at CMC Markets in London.
"Until we get some clear idea of how policy-makers are going to deal with euro-zone sovereign debt problems, it's not getting to get any better."
Global stocks, as measured by MSCI's all-country world equity index, tumbled 4.1 percent and emerging market equities fell 2.8 percent.
WORRIES ABOUT EUROPEAN BANKS
U.S. stocks plummeted in sync with bank shares after The Wall Street Journal reported that regulators were intensifying their review of the U.S. units of European banks.
The sell-off "is rooted in the European banking system," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
"It reflects continued concern that sovereign debt issues indicate we're going to have to bail out all those banks again. And if there's stress in major European banks, it will affect U.S. banks, too."
The president of the New York Federal Reserve Bank, William Dudley, said the U.S. central bank is treating foreign banks the same as their U.S. peers.
U.S. stocks pared losses at the market's close.
The Dow Jones industrial average closed down 419.63 points, or 3.68 percent, at 10,990.58. The Standard & Poor's 500 Index fell 53.24 points, or 4.46 percent, to end at 1,140.65. The Nasdaq Composite Index slid 131.05 points, or 5.22 percent, to finish at 2,380.43.
In Europe, German shares lost the most, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe and intensifying worries about the lack of a plan to address the euro-zone debt crisis.
The European banking sector, widely exposed to the crisis, fell 6.7 percent and is down 29.8 percent this year.
U.S. Treasuries prices soared, with the yield of the benchmark 10-year note falling below 2.0 percent for the first time, according to Reuters data, as investors snapped up the government bonds on fears of a slowdown.
Morgan Stanley told investors that the United States and the euro zone are "dangerously close" to recession, even though it said that was not its base case.
The benchmark 10-year note shot up 27/32 in price to yield 2.07 percent, after slumping to a record low of 1.97 percent.
Yields on British 10-year gilts fell to an all-time low of 2.238 percent and 10-year German debt fell to 2.028 percent.
Gold rallied to its second record high in a week. Spot gold hit a record $1,825.99, although it is still off its inflation-adjusted peak above $2,000 struck in 1980.
U.S. gold futures for December delivery settled up $28.20 at $1,822 an ounce.
Short-term money markets showed further signs of bank stress emanating from Europe's fiscal strains. The benchmark for unsecured dollar loans between banks, three-month Libor, rose to its highest in 4-1/2 months, the latest in recent peaks.
Investors also pulled back over the last week from the commercial paper market, a key source of short-term funding for banks and businesses. These strains have contributed to the stock sell-off and the rush into gold and government bonds.
The U.S. dollar and yen firmed as global growth anxiety and worries about European banks drove investors to the relative safety of both currencies.
The ICE Futures dollar index rose 0.7 percent to 74.195 while the euro fell 0.6 percent to $1.43370.
Crude prices tumbled on the prospect of declining demand.
Brent crude slid $3.61 to end at $106.99 a barrel, breaking below the 200-day moving average, a key technical indicator closely watched by traders.
U.S. crude oil tumbled $5.20, or 5.9 percent, to settle at $82.38 a barrel, and its discount to Brent widened to more than $24 a barrel.
(Reporting by Ashley Lau, Ellen Freilich, Julie Haviv, Matthew Robinson, David Sheppard and Frank Tang in New York; Writing by Herbert Lash; Editing by Jan Paschal)