TOKYO - Fears that the global economy is hurtling towards recession sparked fresh turmoil on world markets Wednesday, with Asian stocks and the euro tumbling.

Hopes that authorities have thwarted a financial system meltdown were overshadowed by growing worries that the global economy faces a deep and prolonged downturn.

"Concerns about the impact of the financial crisis on the real economy are growing rapidly," said Kazuhiro Takahashi, senior analyst at SMBC Daiwa Securities.

"Players are particularly concerned about the situation in Europe. Volatile trading is expected to continue for now," said Takahashi.

The turmoil spilled over into currency markets. The euro hit a near two-year low against the dollar and the British pound plunged to a five-year trough on speculation of further European interest rate cuts to spur economic
growth.

Stocks fell despite an offer by the US Federal Reserve to supply up to 540 billion dollars of help to money market mutual funds in its latest response to the credit crunch.

The market for these assets, which in normal times are considered safe investments offering modest returns, has frozen up in recent weeks as the global financial crisis worsened.

But while credit markets have showed signs of a thaw recently, analysts warned that companies will still find it harder to gain access to credit, while the outlook for their profits is also growing bleaker.

"Credit conditions remain fragile, despite coordinated monetary easing and a series of capital injections by (the Group of Seven rich nations) to support their banks," Nomura equity strategist Sean Darby wrote in a note.

He said consumer spending in the major economies was being hit by falling asset prices and rising unemployment.

"We expect a hard landing for the global economy," he warned.

The Tokyo market was spooked by media reports that auto giant Toyota Motor and megabank Mitsubishi UFJ are likely to suffer sharp falls in earnings.

Wall Street's Dow Jones index sank 2.50 percent on Tuesday after several US companies posted weaker-than-expected quarterly earnings. Most European exchanges also ended with losses.

The Canadian central bank declared the US economy in recession as it announced a second unscheduled interest rate cut this month to stimulate domestic demand.

The contracting US economy would lead to a "mild" global recession, the bank warned, following weeks of turmoil on financial markets and tightening credit.

But an International Monetary Fund senior official said that Europe should avoid the biggest risks posed by the global financial shock thanks to its coordinated "crisis management" measures.