LONDON - MOUNTING concern that the global economy is hurtling towards recession sparked more turmoil on financial markets on Wednesday, with Asian and European stocks mirroring sharp overnight US falls.

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

Tokyo sank 6.79 per cent by the close and Hong Kong lost 5.2 per cent as concerns deepened over faltering world growth.

In late morning trading, the London stock market was down 3.35 per cent, while Paris lost 3.44 per cent and Frankfurt fell 3.25 per cent near the half way stage.

Madrid slumped by nearly six per cent, Milan dropped about two per cent and Zurich was down by almost three per cent.

'European markets are seeing a degree of volatility today and we could see this continue into the US session,' said CMC Markets dealer Ian Griffiths.

'There is a lack of economic data out today (Wednesday) which further cements the fact that the markets are being dominated by the fears and nerves that have be dominating for the last few weeks,' Mr Griffiths added.

Elsewhere in Asia, stocks dropped 5.1 per cent in Seoul to finish at their lowest level for three years, while Sydney ended with a 3.4 per cent loss.

Bangkok declined by 2.8 per cent, Shanghai lost 3.20 per cent and Singapore tumbled 5.19 per cent.

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.

Sterling took a further knock after Bank of England governor Mervyn King said that Britain was 'likely' entering a recession.

Stocks fell despite an offer by the US Federal Reserve to supply up to US$540 billion (S$808 billion) 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 meanwhile 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 per cent on Tuesday after several US companies posted weaker-than-expected quarterly earnings.

The Canadian central bank also 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.