Global stock markets extended their shakeout into a second day Tuesday, plunging amid fears that a possible U.S. recession will cause a worldwide economic slowdown.

Onlookers watch share prices on a screen on the facade of the Bombay Stock Exchange in Mumbai on Tuesday.
(Gautam Singh/Associated Press)

The dramatic declines in Asia and Europe were expected to spread to Wall Street, where stock index futures were already down sharply hours before the trading day began.

Japan's Nikkei 225 index nosedived 5.7 per cent — its biggest percentage drop in nearly 10 years — to 12,573.05, a day after falling 3.9 per cent. Australia's benchmark index sank 7.1 per cent, its steepest slide in nearly 20 years. Hong Kong's Hang Seng index, which slumped 5.5 per cent Monday, was down 8.2 per cent in afternoon trading.

In China, the Shanghai Composite index lost 7.2 per cent to close at its lowest level since August.

Indian Finance Minister P. Chidambaram urged investors to remain calm after trading in Mumbai was halted for an hour when the stock market there fell 10 per cent within minutes of opening. The Mumbai Stock Exchange Sensitive Index ultimately finished down almost five per cent.

"There is no reason at all to allow the worries of the Western world to overwhelm us," Chidambaram said.

Investors across the region dumped shares in frenetic trading on worries that the U.S. economy, battered by a credit crisis and housing slump, will shrink in coming months, weakening demand for Asian exports.

Asian markets closed before the U.S. Federal Reserve came out with a surprise cut in its key federal funds rate of three-quarters of a percentage point.

But European markets — which had been uniformly lower — were still open and rallied following that announcement.

London's FTSE 100 index gained 2.9 per cent and France's
CAC 40 rose 2.1 per cent. Germany's DAX pared its losses to end the day with a 0.3 per cent drop.