North American markets closed sharply down Thursday, mired in worries about a possible U.S. recession and the health of European banks.

Canada's benchmark S&P/TSX composite index finished down 392.90 points, or 3.12 per cent, at 12,186.71. The Dow Jones industrial average in New York traded down 419.63 points, or 3.68 per cent, to 10,990.58. Earlier, it was down as much as 530 points. The Nasdaq composite fell 131.05 points, or 5.22 per cent, to 2,380.43 and the S&P 500 was lower by 53.24 points, or 4.46 per cent, to 1,140.65.

September oil lost $5.20 US in New York to close at $82.38 a barrel.

The Canadian dollar was off by 0.90 of a cent, trading at 101.17 cents US.

'This is yet another stage of panic selling.'—Portfolio manager Gene Peroni Jr.

Gold built on Wednesday's record high close, rising to $1,832.00 US an ounce before slipping back to close at $1,822.00, up $28.20, as traders sought to store their money in the perceived safe haven.

"This is yet another stage of panic selling," said Gene Peroni Jr., a portfolio manager with Advisors Asset Management with $7.3 billion in client assets. "Investors are reacting first and asking questions later."

Last week was one of the wildest in Wall Street history. The Dow moved more than 400 points on four straight days for the first time.

One sign of the fear was the yield on the 10-year U.S. treasury note. It briefly fell below two per cent for the first time, before recovering to 2.09 per cent. In other words, investors were willing to accept less than $20 a year for every $1,000 they lend to the U.S. government for 10 years — an indication they were unwilling to put their money anywhere else.

"After a few days of stabilization, traders have gone defensive again with capital flowing out of stocks and commodities once again into gold … and other defensive positions," Colin Cieszynski, an analyst at CMC Markets Canada, wrote in a report.

"The culprit for today's reversal of sentiment is a return to awareness that stagflation (low economic growth and high inflation) remains a very real prospect, that recession risks are increasing and that the European financial sector may continue to struggle for some time," Cieszynski wrote.

A slew of disappointing economic releases inspired the gloom across almost all sectors. Statistics Canada's leading index suggested little growth in Canada's economy, while separate U.S. releases showed the job picture worsening even as inflation rose and the manufacturing sector fell into a rough patch.

Investors were also keeping a close watch European banks and on developments with regard to Europe's debt crisis (see sidebar), after a little-noticed deal requiring Greece to put up collateral in order to receive a bailout loan from Finland triggered similar requests from several other eurozone countries.

Potentially, these requests could complicate a broader €109 billion ($155 billion) Europe-wide bailout of Greece.

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Traders work in the oil options pit on the floor of the New York Mercantile Exchange on Aug. 11. Oil fell almost six per cent Thursday. ((Mario Tama/Getty Images))

Reports said Austria, the Netherlands, Slovenia and Slovakia would probably pursue similar collateral arrangements with Greece.

In Europe, French bank Société Générale shares fell 12.34 per cent and British bank Barclays fell 11.47 per cent, leading most major banks in the eurozone lower.

"Banking stocks have been decimated across Europe, with indiscriminate selling even in banks that maintain their exposure to the crisis is slim," said Will Hedden, a sales trader at IG Index.

Britain's FTSE 100 closed down 4.5 per cent, to 5,092.23, and Germany's DAX fell 5.8 per cent, to 5,602.80. France's CAC-40 was down 5.5 per cent, at 3,076.04.

The picture was not much better in Asian trading. Japan's benchmark Nikkei 225 closed down 1.3 per cent to 8,943.76 after the Finance Ministry said July exports fell 3.3 per cent from a year earlier, to 5.78 trillion yen ($75.6 billion US). The downturn was largely due to the strong yen and the continuing impact of the March 11 earthquake and tsunami.

South Korea's Kospi lost 1.7 per cent to 1,853.08.

Hong Kong's Hang Seng shed 1.3 per cent at 20,016.27, though shares of stock market operator Hong Kong Exchanges and Clearing Ltd. jumped 3.6 per cent after it announced it is in talks with counterparts in mainland China to set up a joint venture to develop new financial products. Ping An Insurance Co. of China Ltd. lost three per cent even though it announced a 33 per cent increase in first-half profit.

With files from The Associated Press