"Once again a market rally is brought to a juddering halt by dramatic falls across global markets," said Matt Buckland, a dealer at CMC Markets.
"The persistent fear of a global recession shrugged off the cheer about banking rescue plans in the previous session with the Dow down 7.9 percent and the S&P500 off 9 percent, their worst one-day percentage falls since 1987, as U.S. retail sales were weaker than expected and the Fed's Beige Book showed weakening economic activity across the country," he added.
The FTSE 100 index of leading British shares was down 114.03 points, or 2.8 percent, at 3,965.56, while Germany's DAX was 121.13 points, or 2.5 percent, down at 4,750.50. The CAC-40 in France was 113.04 points lower, at 3.3 percent, at 3,268.03.
The renewed selling means that the world's stock markets are more or less back where they were at the start of the week, before they breathed a sigh of relief on the unveiling of a series of bank rescue packages from governments around the world to restore confidence.
The Swiss government Thursday became the latest to announce its plans to support its banking system with billions of dollars. The main recipient will be UBS AG, which is being offered up to $54 billion so that it can part with securities that have gone bad since the start of the worldwide financial crisis. Credit Suisse said it had also been offered government assistance but would not make use of it at this time, choosing instead to raise about 10 billion Swiss francs ($8.75 billion) on the open market.
On Tuesday, the U.S. government followed Europe's lead and announced it is to pump some US250 billion into shares of its leading banks as part of the $700 billion package passed by Congress earlier this month.
The U.S. plan was criticized overnight for being insufficient by Japanese Prime Minister Taro Aso. He blamed the renewed drop in markets on an "insufficient" U.S. bailout plan totaling $700 billion. "Since it was insufficient, the market is again falling sharply," Aso told lawmakers.
The long-term key is whether the flurry of activity by governments can actually break the logjam in credit markets. Despite the coordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week. That could in turn make it harder for businesses and consumers to get the credit they need and hurt the economy.
The Hong Kong interbank offered rate, known as Hibor, for three-month loans actually ticked up slightly overnight to 4.35 percent after easing the past couple of days.
Though the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown. Fed Chairman Ben Bernanke warned in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.
"Everyone is very worried about the economy in the U.S and around the world," said Jacky Choi, a Hong Kong-based fund manager at Value Partners Ltd., which manages about $5 billion in Asia.
Concerns about the global economic outlook are clear also in the price of oil, which has fallen another $1.88 to $72.66, a new 13-month low.
Commodity stocks are also in retreat after Rio Tinto PLC, one of the world's biggest mining giants, warned of slowing raw material demand from China, the world's biggest growth engine over the last few years. "The Chinese economy is pausing for breath after spectacular GDP growth," the company's chief executive Tom Albanese said.
Earlier, Tokyo's Nikkei 225 stock average slid 1,089.02 points, or 11.41 percent, to 8,458.45, its biggest drop since the 1987 stock market crash.
In South Korea, the main index dropped 9.25 percent after Standard & Poor's said it may downgrade the credit ratings of some of the country's leading banks. The ratings agency warned the credit crisis could make it difficult for the companies to refinance maturing debt.
And Hong Kong's key index trimmed losses, closing down 4.8 percent after falling more than 8 percent earlier. Australia's main share index fell 6.7 percent while India's was down 4 percent.
The panic selling in Asia hit many sectors. Export-linked shares such as top Japanese automaker Toyota Motor Corp., which was off 9.3 percent, retreated on worries about declining U.S. demand.
Resource firms slumped along with global commodity prices, with BHP Billiton Ltd., the world's largest mining company, losing 13 percent. In financials, KB Financial Group Inc., the holding company for top South Korean lender Kookmin Bank, lost almost 15 percent.
Meanwhile, insurance policies against companies failing to make good on their debt, known as credit default swaps, were more expensive - a signal that firms believe the risk of default is growing.
The U.S. dollar edged up to 100.43 yen, while the euro rose to $1.3473.
Associated Press Business Writer Jeremiah Marquez in Hong Kong and AP Writer Shino Yuasa in Tokyo contributed to this report.