KEY POINTS:
New Zealand investors will be braced for a Waitangi Day hangover this morning after world markets took a fresh nosedive over the holiday break.
With the local exchange closed, New Zealand stocks avoided a global rout which began on Wall Street with new economic data providing more evidence
that the US faces a serious recession.
US markets fell around 3 per cent. Despite the already volatile start to the year this was the biggest single-day fall on Wall St for 11 months.
The falls took losses on the S&P 500 to 9 per cent for 2008 - the worst-ever start to a year in the benchmark's eight-decade history. The Dow was down 7.5 per cent for the year and the Nasdaq had lost 13 per cent.
By the close of trading on Tuesday the S&P 500 had now fallen 4.2 per cent for the week, the steepest two-day retreat since January 2003.
The drop was followed by similar losses in markets across Europe.
But Asian markets took even bigger hits yesterday with Hong Kong's Hang Seng index losing 5.4 per cent and Japan's Nikkei shedding 4.7 per cent.
In Australia the ASX-200 shed 3.17 per cent yesterday, closing down 183.5 points to 5609.4.
The renewed investor sell-off follows more than a week of relative calm since US agencies took emergency steps to prop up the ailing economy.
There were hopes that two big interest rate cuts by the Federal Reserve and a US$150 billion ($192 billion) economic rescue package proposed by George W. Bush might head off a recession at the pass.
But Tuesday's data has shown there is more economic instability to flow through the market. Already some analysts are tipping another emergency rate cut by the Fed.
US stocks went into a tailspin over a shockingly weak reading on the activity of the non-manufacturing service sector.
Sentiment took a hit as a report from the Institute of Supply Management showed the vast services sector of the US economy contracted in January for the first time in nearly five years. David Rosenberg, economist at Merrill Lynch, said the report signalled the economy might be in even worse condition than anticipated and might force the Fed to cut rates again before its March 18 meeting.
"Indeed, not only is the economy in a downturn, the abruptness and depth of the decline seen in this report, not to mention the collapse in auto sales in January and unprecedented tightening in credit conditions ... adds to our concern that we are facing a much deeper downturn than we saw in 2001," he wrote in a note to clients.
Sal Guatieri at BMO Capital Markets said the survey, which measures the lion's share of economic activity, "provides compelling evidence - along with the decline in payrolls and a 6 per cent slide in auto sales in January - that the US economy is in recession."
Mark Fightmaster at Schaeffer's Investment Research said the report "was just another bit of bad news piled upon the already fragile economy".
The analyst said Richmond Federal Reserve president Jeffrey Lacker "did little to help matters by uttering the 'R' word ... Lacker noted that the economy faces the risk of a recession, a statement that sent investors scrambling."
The financial sector bore the brunt of the losses amid growing worries about the spillover of the US housing crisis.
There were also fresh concerns that some players in the bond insurance market - which underpins lending by the heavyweight US banks - may still face ratings downgrades.
If the bond insurers lose their AAA ratings, analysts estimate US banks will face tens of billions of dollars worth of fresh losses.
WORLDWIDE FALLS USA
* S&P500 - down 3.2 per cent
* Dow Jones - down 2.9 per cent
* Nasdaq - down 3.08 per cent
AUSTRALIA
* ASX200 - down 3.17 per cent
ASIA
* Hang Seng - down 5.4 per cent
* Nikkei - down 4.7 per cent
UK
* FTSE 100 - down 0.3 per cent in early trading last night