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TSX three-month chart

Toronto stocks erased the bulk of their early lossesin veryheavy trading Thursday as investors seemed toadjust tofearthat credit-market problemswill spread to the wider economy.

Amid a deluge of buy and sell orders, thetrading was busier than ever before, the Toronto Stock Exchange announced.

The S&P/TSX composite index, downas much as 585 points earlier, narrowedits loss to200.06 points to close at 12,848.70.It was still down1.5 per cent, withnearly all sectors lower.

The sell-off leaves the TSXabout 1,775 points points below the record high set July 19 anddown about 60 points for the year as a whole.

The exchange said 708.05 million shares changed hands,eclipsing the previous record of 499.8 million set July 12, and there were 996,311 transactions, beating a record of 707,853 set on Aug. 10.

Some of the worst damage came in the resources area, withthe goldindexoff5.5 per cent.

Commodity prices fell dramatically amid a worldwide rush to assets perceived to be less risky, a so-called flight to quality.

Gold futures tumbled nearly $22 US an ounce to about $658 US an ounce in New York trading. Oil futures fell $2.70 US to $70.63 US a barrel.

The TSX Venture Exchange — home to many junior resource stocks — plunged more thaneight per cent.

Analyst Jon Nadler of KitcoMetals Inc. said gold's woes have "once again given rise to speculation that forced liquidation sales are behind the slump and that safe-haven buying is unable to offset the unwinding of position by larger players."

The Dow Jones industrial average, down as much as 343 points earlier,was downonly 15.69 pointsat 12,845.78. Earlier, the New York Stock Exchange imposed trading curbs.

The North American roller-coaster ride followed significant drops in Asian and European stock markets.

Danielle Bochove of CBC News Business said credit worries were driving the markets lower.

'All of Asia and other European markets are watching the U.S. market.' —James Soh, investment strategist in Seoul

"What we have now is a brewing crisis in confidence. Lenders are afraid, and they are beginning to stop lending or they're charging higher interest rates to lend, which means that whole era of cheap money that's fuelled so much of the global activity is ending," she reported.

On Bay Street, playersstruggled to figure out what will happen next.

In a report Wednesday night, Merrill Lynch (Canada) strategist David Wolf said there is hope that the crisis will pass, butthere is also risk thatdefaults in the commercial paper marketwilllead toforced asset sales and a further unravelling of the credit system.

"Assigning probabilities to these outcomes is, for us, impossible at this point, but we feel it important to highlight what we see as a potentially important event risk— in Canada and beyond— in the coming days."

A CIBC World Markets reportearly Thursday said "still-solid fundamentals create a potential buying opportunity for investors with a longer-term perspective," even though the stock-market turbulence is likely to persist in coming weeks.

And a report fromRBC Financial Group's economics department said:"Our expectation is that generally healthy financial conditions outside of housing will prevent the weakness in equities from continuing."

Asian stocks fall

Overseas, Asian stocks fell to their lowest in months Thursdayand European stocks followed in early trading, battered by persistent jitters over U.S. housing loan problems and their possible damage to global financial markets.

The benchmark Nikkei 225 index closed down nearly two per cent on the Tokyo Stock Exchange after falling below the key 16,000-point mark for the first time since November.

South Korea's main benchmark fell 6.9 per cent to its lowest finish since May, and Hong Kong's blue-chip Hang Seng Index dropped 3.3 per cent to its lowest close in two months.

European stock indices also sank, with Britain's FTSE down 4.1 per cent and France's CAC-40 down3.3 per cent, and Germany's DAX down2.4 per cent.

System gets cash infusion

The Bank of Canada put another $370 million into the financial system Thursday.

The same day, the Federal Reserve added $12 billionUS to the U.S. banking system. Other central banks have been pouring cash into their banking systems as well since the end of last week.

But the injections have failed to quash investors' jitters and halt the global slide.

Some investors have been calling for the U.S. central bank to free up more cash by making an interest rate cut at its Sept. 18 meeting.

The Bank of Japan injected 400 billion yen ($3.4 billion US) into money markets Thursday morning, the third time since last Friday it has acted in a bid to curb rises in a key overnight interest rate.

With files from the Associated Press