So what does this all mean? First guess: Anyone looking to Congress, the White House or the supercommittee for answers to U.S. economic problems — or for even a hint as to the future direction of the U.S. economy, is almost certainly looking in the wrong place. The biggest downside threat to the U.S. economy, right now, is Europe. Whether or not Merkel can steer a path toward resolution of the Greek crisis will likely exert far more influence on American livelihoods than whether or not the payroll tax cut gets extended, or even whether Republicans succeed in forcing more austerity down U.S. throats.

Just how exposed U.S. banks are to Europe is a hotly debated question — some banking analysts claims direct exposure is relatively minimal, while others note that we just have no idea how much credit default swap insurance U.S. banks have sold to European banks.

Who ends up holding the bag if Europe implodes? Astonishing as this is to contemplate, just three years after credit swaps played a major role in precipitating the financial crisis of 2008, we just don’t know. But even in the midst of our ignorance, formulating a disaster scenario is child’s play.

If Greece slips into default (controlled or uncontrolled) and Italy follows down the insolvency garden path, French banks are certainly in big trouble. If the French banking sector collapses, at the very least, Europe will be headed for recession, and at worst, the interconnectedness of the global banking system will transmit chaos straight across the Atlantic to New York in less time than you can say “systemic event.”

Another recession in Europe would be bad enough — add yet another grim headwind to the troubles limiting U.S. growth. But another global credit crunch? Is it any wonder that every new headline from Europe seems to spark an immediate zig or zag in the U.S. stock market?

The selling began in Asia, where Japanese exports fell for a fifth straight month, and continued in Europe, where bank stocks were hammered because of worries about debt problems there, which have proved hard to contain.

On Wall Street, the losses wiped out much of the roughly 700 points that the Dow had gained over five days. Some investors who bought in the middle of last week decided to sell after they were confronted with a raft of bad news about the economy:

– More people joined the unemployment line last week than at any time in the past month. The number of people filing claims for unemployment benefits for the first time rose to 408,000, or 9,000 more than the week before.

– Inflation at the consumer level in July was the highest since March. More expensive gas, food, clothes and other necessities are squeezing household budgets at a time when most people aren’t getting raises.

– Sales of previously occupied homes fell in July for the third time in four months — more trouble for a housing market that can’t seem to turn itself around. This year is on pace to be the worst since the late 1990s for home sales.

– Manufacturing has sharply weakened in the mid-Atlantic states, according to a report from the Federal Reserve. Manufacturing had been one of the economy’s strongest industries since the recession ended in 2009, but its growth has slowed this year.

The manufacturing news was especially bleak on an already bad day, said Dan Greenhaus, chief global strategist at brokerage BTIG. He called the Fed report “an atrocious set of numbers.”

“That really set the market on its head,” he said.

Wall Street and other financial markets have wrestled for several weeks with fears that a new recession might be in the offing. Morgan Stanley economists said in a report Thursday that the U.S. and Europe are “dangerously close to recession.”

“It won’t take much in the form of additional shocks to tip the balance,” they wrote.

Worries about European debt also hang over the market. A default by any country would hurt the European banks that hold those European government bonds, plus American banks that have lent to their European counterparts.

Renewing the fears, The Wall Street Journal reported Thursday that U.S. regulators are looking at the U.S. arms of big European banks to make sure they have enough money for day-to-day operations.

“I don’t want to pretend that the market knows what it’s thinking about too much,” said David Kelly, chief market strategist at JPMorgan Funds. “We live in an environment of sell now and ask questions later. The European market was off very heavily this morning before the markets opened. But honestly there wasn’t any news of any substance. We always collect whatever crumbs we can find and point to them.”

Asian markets started Thursday’s drop. Japan’s Nikkei 225 index fell 1.3 percent. The main stock indexes in South Korea and India each dropped a little more, then Europe more than that — 4.5 percent in Britain and 5.8 percent in Germany.

In the United the United States, the Dow fell 419.63 points, or 3.7 percent, to 10,990.58. The Standard & Poor’s 500 index fell 53.24, or 4.5 percent, to 1,140.65. The Nasdaq composite fell 131.05, or 5.2 percent, to 2,380.43.

The Dow is down 13.6 percent since stocks began falling July 21 — four weeks that have rattled Americans watching their retirement savings and other investment accounts shrivel.

Lee Applegate, a retired sales executive from Cincinnati, watched the latest market plunge uneasily but said he was planning to stay the course with his investments. He and his wife have several retirement accounts.

He remembers the mistake he made in pulling his money out of stocks in early 2009, just before the market started its two-year surge. Since March 9 of that year, the S&P 500 is up 68.6 percent.

“I think things are going to get worse before they get better,” Applegate said. “But I’m still going to ride it out.”

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. But stocks had been relatively stable this week because investors were calmed by strong earnings reports.

The Dow had fallen 76 points Tuesday and risen four points Wednesday — the first time in nearly three weeks that the average rose or fell by less than 100 points on two straight days.

That ended Thursday. And with stocks down big, money flooded into U.S. Treasurys and gold, both considered safer investments.

The yield on the 10-year Treasury note briefly fell below 2 percent for the first time, hitting 1.98 percent, before rising to 2.07 percent. Low yields show that investors are willing to accept a lower return on their money in exchange for safety.

The price of gold reached yet another high — almost $1,830 per ounce. Gold keeps setting records, with some investors looking for stability and others simply looking to cash in.

The price of oil fell $5.20 to $82.38 per barrel after the economic reports raised concern among traders that demand for gasoline would fall. One survey this week found Americans have already cut back on gas 21 weeks in a row.

And the average rate on a 30-year fixed mortgage fell to its lowest on record. The rate on the 30-year fixed, the most popular mortgage, hit 4.15 percent — the lowest in at least 40 years and barely beating the record from last November. The last time long-term rates were lower was in the 1950s, when 30-year loans weren’t even widely available.

Nicole Sherrod, a managing director at broker T.D. Ameritrade, said the market volatility has led more clients to put automatic protections in place to sell a stock or an investment fund once it falls below a certain value.

“Our clients are saying that this is not a buy and hold market,” she said. “This is a buy and protect market.”

In addition, computer systems that are programmed to analyze charts, capitalize on tiny changes in price and execute trades with no human intervention are making the market rougher.

High-frequency trading programs make up about half of the trading volume in a normal market day but 70 percent or more on a volatile one.

AP Business Writers Dave Carpenter in Chicago and Matthew Craft and David K. Randall in New York contributed to this report.

A number of European banks are already dependent on last-resort credit from the European Central Bank because of a reluctance among financial institutions to lend to one another since many are heavily exposed to bad debt like that of Greece, Portugal, Italy and other foundering countries.

The European Central Bank said Thursday that one bank had borrowed $500 million a day earlier for seven days through the bank’s dollar lending program at 1.1 percent. The bank was not identified.

A request for dollars from the ECB suggests that at least one big bank is having trouble obtaining funds. Analysts said fears about one bank’s troubles are enough to spark concerns about the entire industry because traders are already worried about banks’ sovereign debt holdings.

“These are worrying signs,” said Neil MacKinnon, an economist at VTB Capital in London. “You could think of it as a mini-Lehman moment: There is the risk that a major eurozone bank might be a casualty.”

In 2008, the investment bank Lehman Bros. filed for bankruptcy, causing the global credit markets to freeze up almost overnight. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers were unable to get loans.

Last week the European Central Bank opened its credit window and let banks borrow as much as they wanted for six months, an unusually long time that gives them more certainty about their funding. The ECB allotted 114 banks euro49.75 billion, more than expected.

In a move that could compound liquidity fears, U.S. regulators said they were stepping up scrutiny of European banks’ U.S.-based subsidiaries, according to two people familiar with the situation. Banks are meeting more frequently than usual with supervisors from the Federal Reserve Bank of New York and the New York State Banking Department, said the people, who spoke on condition of anonymity to discuss confidential matters of bank supervision.

Analysts said that regulators are pressing the foreign-based banks to park more of their dollars in the U.S., in case their European parents falter and start draining them. Federal Reserve data show that foreign-based banks are storing more cash here — $127 billion near the beginning of August, up from $86.1 billion in June.

A similar spike occurred before the 2008 crisis, analysts with Keefe, Bruyette & Woods said in a research note Thursday.

Protecting foreign bank subsidiaries has been a priority for regulators since that crisis. Lehman’s bankruptcy filing fed the global panic in part because the legal and financial status of its European operations were not clear to other banks and investors.

Poor economic news in the U.S. also seemed to be driving the flight from banks, which was also seen on Wall Street. Shares of big U.S. banks plunged faster than the broader market indexes. Bank of America Corp. and Morgan Stanley dropped about 7 percent, while Citigroup Inc. skidded nearly 9 percent. The Dow Jones industrial average was down more than 4 percent.

“People are putting the pieces together,” said Will Hedden, a sales trader with IG Index.

Some of those pieces are an increase in claims for unemployment benefits in the U.S. and Morgan Stanley’s decision to cut its global growth forecasts for 2011 and 2012. Many European banks hold substantial amounts of Greek debt, and have begun to take writedowns on those holdings.

Banks have also been undermined by Tuesday’s revelation from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the two countries’ finance ministers would come up with a proposal to slap a tax on all trading transactions.

A transaction tax — a small percentage taken from foreign exchange and share transactions, for instance — has been proposed as a source of money to pay for bank bailouts but could hurt trading volumes — a key source of revenue for many of Europe’s banks.

If banks and investors had been holding their breath hoping for a panacea from Sarkozy and Merkel, they were disappointed, and Thursday’s dive could reflect the realization that there’s no easy way out of Europe’s problems.

“All we got was more taxes and more bureaucracy and more austerity,” said MacKinnon.

A Finnish deal to get collateral from Greece to secure its rescue loans to the debt-ridden country has also raised renewed concerns over Europe’s handling of its debt crisis.

Many of Europe’s banks, including Societe Generale and Commerzbank, have already taken big writedowns over their holdings of Greek debt and anything that makes Greece’s second financial bailout less likely has been viewed with dismay. Commerzbank, Germany’s largest commercial holder of Greek debt, wrote off euro760 billion ($1.1 billion) in Greek bonds, all but wiping out its second-quarter earnings.

Last month’s decision by eurozone countries to grant Greece a second financial bailout, worth a total of euro109 billion ($157 billion), called for banks, pension funds and other private institutions that hold Greek debt to take their share of the pain.

Daniel Wagner reported from Washington. Pan Pylas in London and David McHugh in Frankfurt contributed to this story.

The ESMA said in a statement that the four countries “have today announced or will shortly announce new bans on short-selling or on short positions” as of Friday.

The French market regulator, the AMF, announced late Thursday that it is banning for 15 days net short-selling on 11 stocks, including those of banks Societe Generale, BNP Paribas and Credit Agricole and leading insurers.

Belgium’s market authority said it would ban short-selling on financial shares such as leading banks and insurers as of Friday. Belgium had already banned naked short selling, basically a bet on a decline in the price of a share without borrowing the share, since August 2008.

Several countries banned short selling amid the financial crisis of 2008 to try to tame volatility. But some experts said the bans actually contributed to a feeling of uncertainty.

French bankers and officials scrambled to soothe investors’ nerves after days of suggestions that France could be the next major economy to lose its coveted triple-A credit rating. By late in the day, those efforts appeared to have an effect, but economists said the rebound remained very fragile.

The European Union’s markets supervisor said Thursday that regulators were increasing surveillance of financial markets following the days of steep selloffs.

Bank of France head Christian Noyer blamed “unfounded rumors” for plunges in the shares of top banks, including Societe Generale and BNP Paribas, and said the country’s financial institutions were sound. The country’s market regulator warned of sanctions against anyone who fuels or profits from rumors that fed the sell-off.

Noyer said that French banks’ first-half earnings “confirmed their solidity in a difficult economic environment” and that the banks’ capital cushions were healthy.

French bank stocks fell Thursday until strong U.S. jobs data helped propel solid gains on Wall Street late in the European trading day. BNP Paribas closed up 0.3 percent and Societe Generale rose 3.7 percent.

France is taking pains to assure markets that it won’t be the next to see its credit rating downgraded.

Attention will be on France’s release of second-quarter GDP figures on Friday. Some have warned that France could suffer if it has to spend significant new money to bail out more struggling eurozone states.

The leaders of the eurozone’s biggest economies, Germany and France, announced they will meet Tuesday to discuss solutions to Europe’s financial difficulties.

French President Nicolas Sarkozy’s office said that the two will come up with “joint proposals” on the governance of the eurozone before the end of the summer. Chancellor Angela Merkel’s spokesman said the meeting would focus on suggestions for how to improve the zone’s economic policy and crisis management.

All three leading credit rating agencies reaffirmed their triple-A assessment of France, and analysts said they could not identify a trigger for the market turmoil.

“There’s nothing behind it, it’s a market of malintentioned speculators trading on pure rumors,” said Marc Touati, an economist at French trading firm Assya Compagnie Financiere.

After Societe Generale, France’s second-biggest bank, saw its share price drop nearly 15 percent Wednesday, the bank asked the French market regulator to investigate the rumors that it was on the ropes because of its heavy exposure to debt from troubled eurozone economies.

Societe Generale CEO Frederic Oudea called the rumors “totally unfounded” and “irrational.” Speaking on France-Info radio, he urged calm and insisted that the bank’s fundamentals are sound.

Oudea said Societe Generale had already accounted for its exposure to Greece’s debts in its second quarter earnings.

France’s growth prospects are considerably better than those of Italy and Spain’s, but its economic expansion is slowing and it’s failed for years to reduce a deficit that stood at 7.1 percent last year. No other eurozone economy with a triple-A rating has a higher debt than France’s — around 85 percent of national income.

Adding to market worries, French presidential elections scheduled for the spring of 2012 may make it difficult for the government to implement further austerity measures at a time when the economy is slowing.

Elsewhere in Europe, Greece announced a rise in unemployment after a series of unpopular austerity measures aimed at dragging it out of debt that sparked troubles across the eurozone.

And Italy’s finance minister, Giulio Tremonti, told lawmakers Thursday that tough and speedy measures are needed over the next two years to balance the budget in 2013. The market turbulence has seen Italy’s borrowing costs in the markets spike up to uncomfortably high levels.

Gabriele Steinhauser in Brussels and Melissa Eddy in Berlin contributed to this report.