That continued into Asian and European trading sessions Wednesday, although traders remained nervous after the market turmoil of recent weeks, which has sent many global markets officially into bear market territory — falling 20 percent from recent peaks. That nervousness became more acute as the U.S. open loomed and European markets gave up all their earlier gains.

“So far, panic has eased but fear remains,” said Kit Juckes, an analyst at Societe Generale.

In Europe, the FTSE 100 index of leading British shares was down 1.4 percent at 5,093 while Germany’s DAX fell 2.5 percent to 5,814. The CAC-40 in France was 2.5 percent lower at 3,098.

In the U.S., the Dow Jones industrial average was down 2.7 percent at 10,940 while the broader Standard & Poor’s 500 index fell 2.6 percent to 1,141.

Over the past few weeks, markets have suffered a severe reverse amid worries over the U.S. economic recovery and the country’s debt situation in light of a protracted debate in Congress to get the debt ceiling lifted. That contributed to last weekend’s announcement by Standard & Poor’s to downgrade the U.S.’s credit rating for the first time ever.

And in a sharp reversal of opinion, economists now believe there is a greater chance of another U.S. recession.

The other major market concern is Europe’s debt crisis. Investors have grown increasingly worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe’s 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and even higher borrowing costs for the two countries.

The European Central Bank stepped in Monday and began buying billions of euros worth of their bonds. The move has helped to lower yields on Spanish and Italian bonds to around the 5 percent mark from over 6 percent. The two countries’ borrowing costs, though high compared to Germany and other euro countries, are considered manageable for now.

Earlier in Asia, the Shanghai Composite Index rose 0.9 percent to 2,549.18 and the smaller Shenzhen Composite Index gained 1.4 percent. Indexes in Taiwan and India also gained. Hong Kong’s Hang Seng jumped 2.3 percent to 19,783.67.

Japanese stocks underperformed somewhat as investors continued to fret over the export-sapping appreciation of the yen.

Japan’s Nikkei 225 index climbed 1.1 percent to close at 9,038.74 as the dollar headed near to post World War II lows against the yen. By mid-afternoon London time, the dollar was 0.9 percent lower at 76.40 yen, not far above the level last week that prompted the Bank of Japan to intervene in the markets.

Meanwhile, the euro was down 0.8 percent at $1.4246.

In the oil markets, prices fell from earlier highs as stock markets turned lower again. Benchmark oil for September delivery was up $1.34 to $80.64 a barrel in electronic trading on the New York Mercantile Exchange. Earlier oil prices had risen to $82.

Pamela Sampson in Bangkok contributed to this report.

The Dow finished the day down 5.5 percent. The point decline was the worst since Dec. 1, 2008, and the sixth-steepest ever. The average ended at 10,809.85, its first close under 11,000 since November.

In a bit of irony following the S&P downgrade, investors decided U.S. debt was one of the safest places to be. They also sought refuge in gold, which set a record price.

“The S&P downgrade of U.S. government debt is the least of our problems,” said economist Scott Brown at Raymond James & Associates. “The bigger worry is subpar economic growth and the threat of a new recession.”

Economists at Goldman Sachs peg the chances of another recession at one in three, most likely in the next six to nine months. The threat was barely talked about earlier this summer.

The U.S. economy grew at a feeble 0.8 percent annual pace the first half of 2011, its slowest since the end of the Great Recession in June 2009. Manufacturing and consumer spending have slowed dramatically.

Oil prices plunged 6 percent to the lowest price of the year Monday — $81.31 a barrel. Investors predict a weakening economy means that consumers and businesses will buy less gasoline.

The turmoil in the U.S. markets was the end of a daylong rout that swept the world. Stocks lost 4 percent in South Korea and 2 percent in Japan, then 5 percent in Germany and 4 percent in France.

In the U.S., stocks fell even though Moody’s, another major credit rating agency, stood by its top rating of Aaa for the United States. It said it could downgrade the U.S. if it did not cut its deficit, “but it is early to conclude that such measures will not be forthcoming.”

Financial markets were not comforted by an afternoon statement by President Barack Obama, who said Washington needs more “common sense and compromise” to tame its debt.

“Markets will rise and fall,” he said. “But this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country.”

Across the Atlantic, policymakers struggled to contain a debt crisis of their own. The threat of default has spread from relatively small countries like Greece and Portugal to bigger ones — Italy and Spain.

If either of those countries failed to meet their debt payments, Italian and Spanish banks would absorb losses on their holdings of their countries’ government bonds.

Then the pain could spread outward — to foreign banks that made loans to Spanish or Italian banks and beyond.

The European Central Bank stepped in Monday, buying billions of euros’ worth of Italian and Spanish bonds to drive down dangerously high interest rates. But the move does nothing to address the underlying problem: huge Italian and Spanish debts that could require a bailout and strain the resources of the European Union.

S&P added to the anxieties Friday night by downgrading long-term U.S. government debt — Treasury securities with maturities of more than a year — by one notch, from AAA to AA+.

Then on Monday, it downgraded the credit ratings of Fannie Mae, Freddie Mac and other government agencies that rely on the creditworthiness of the federal government.

In withdrawing the top credit rating, S&P blamed political paralysis in Washington. Republicans and Democrats agree on the need to reduce massive annual budget deficits that have left the United States holding $14.3 trillion in debt. But they can’t agree how to do it. Republicans refuse to raise tax revenues, and Democrats resist cuts to social programs such as Medicare and Social Security.

But in their first opportunity to buy long-term Treasurys after S&P declared them riskier, investors paid a premium for them. The yield on 10-year Treasury bonds fell to 2.34 percent Monday from 2.56 percent Friday as investors bid prices up.

“What you’re seeing amply demonstrated today is that, should there be any question about the stability of the global economic backdrop, the U.S. dollar rises in value, and Treasurys are still the pre-eminent flight-to-quality security in the world markets,” said Robert Tipp, chief investment strategist with Prudential Fixed Income.

The drop in Treasury yields signals that investors are more worried about slowing growth than they are about the credit risk posed by the U.S. government. Investors signaled Monday that nothing has shaken their confidence that the U.S. will pay its creditors.

Many investors flee to Treasurys when there are signs economic growth is deteriorating. Steven Major, a strategist at HSBC Bank, said 10-year yields could drop as low as 2 percent if the U.S. stumbles back into recession.

S&P’s decision does pose one risk, said Jan Hatzius, Goldman Sachs’ chief economist: It could force the U.S. government to cut spending and reduce its budget deficit faster than it would otherwise.

Hatzius is already forecasting that cuts in government spending could reduce U.S. growth by 1 percentage point in 2012. Overall, the U.S. economy is likely to grow a meager 2 percent to 2.5 percent through next year, Hatzius said in a conference call Monday.

But the pressure on policymakers to reduce government deficits could lead to additional steps that will slow growth. For example, the White House and Congress could allow a cut in Social Security taxes to expire at the end of this year, as scheduled. That could subtract another one-half percentage point from the economy’s growth rate, Hatzius said, and raise the risk of a recession.

Government spending cuts, especially at the state and local level, are already a drag on economic growth. From April through June, public cuts lowered economic growth, which was running at a weak 1.3 percent annual rate, by 0.23 percentage points.

Since the federal government seems unlikely to do much to stimulate the economy, attention is turning again to the Federal Reserve, which meets Tuesday.

Doug Roberts, chief investment strategist at Channel Capital Research, said the weakening economy and international turmoil mean the odds have “increased substantially” that the Fed will ultimately announce a new round of bond purchases designed to jolt the economy by pushing down long-term interest rates. The Fed ended a $600 billion bond-buying program in June.

“What’s rocking the market is a growth scare,” said Kathleen Gaffney, co-manager of the $20 billion Loomis Sayles bond fund.

She said the market is worried not about the downgrade but about how the U.S. and Europe will grow their way out of their debt problems.

“The gravity of the situation won’t be dealt with until the market continues to riot to get their attention,” she said.

——

AP Business Writers Christopher S. Rugaber and Daniel Wagner in Washington and David K. Randall in New York contributed to this article.

“The reverberations from S&P’s downgrade are still being felt across the globe,” said David Jones, chief market strategist at IG Index.

For a brief while Monday, it seemed that the risky decision by the European Central Bank to buy the bonds of Italy and Spain in order to help them pay their way had helped ease the selling pressure, at least in Europe, but that soon changed.

Monday’s trading came after one of the worst market weeks since the collapse of U.S. investment bank Lehman Brothers in 2008 — around $2.5 trillion was wiped off global stocks last week.

In Europe, Britain’s FTSE 100 index of leading British shares was down 1.7 percent at 5,157 while France’s CAC-40 fell 1.6 percent to 3,227. Germany’s DAX was 2.3 percent lower at 6,091.

Sentiment in Europe was hurt by an expected sell-off at the U.S. open — Dow futures were down 1.8 percent at 11,196 while the broader Standard & Poor’s 500 futures fell 2.1 percent to 1,173.

So far, the S&P downgrade doesn’t seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.

“Early market reactions suggest that the treasury market will remain well supported,” said Jane Foley, an analyst at Rabobank International. “Even though there may be no sharp sell-off in treasuries this week, S&P’s decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely.”

In Europe, a particular focus has also been on the bond markets and the ECB’s statement late Sunday that it would “actively implement” its bond-buying program to calm investor concerns that Italy and Spain won’t be able to pay their debts. Last week, worries over the two countries’ ability to keep tapping bond markets contributed to the turmoil in global markets.

Traders say the European Central Bank has spent around euro2 billion already Monday and that’s really had a marked impact on the cost of borrowing for both countries. The yield on Italy’s ten-year bonds fell 0.62 percentage point to 5.38 percent while Spain’s tumbled 0.83 percentage point to 5.21 percent.

Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

“We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets,” they said.

However, many analysts think that the international efforts may not be enough to calm jittery markets.

“Investors are concerned about a rising risk of global recession, credit downgrades especially now in the eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash,” said Neil MacKinnon, global macro strategist at VTB Capital.

Earlier in Asia, the repercussions of S&P’s downgrade weighed on stock markets.

Among the major markets, Japan’s Nikkei 225 stock average closed down 2.2 percent 9,097.56, while Hong Kong’s Hang Seng fell the same rate to 20,490.50. South Korea’s Kospi ended 3.8 percent lower as did China’s main exchange in Shanghai.

In the currency markets, the euro was down 0.3 percent at $1.4265 while the dollar was down 0.6 percent at 77.80 yen. The U.S. dollar also hit another record low against the Swiss franc.

Fears over the global economy are having a major impact on oil markets, with the main New York rate down another $2.99 to $83.91 a barrel.

Pamela Sampson in Bangkok contributed to this report.

From a left-wing Keynesian perspective, it is tempting to wonder whether the debt ceiling deal’s likely contractionary impact on economic growth is finally sinking in, but even that explanation doesn’t seem sufficient to account for a market plunge on this scale.

The failure of the U.S. political system to properly address a slowing economy is surely an important underlying factor propelling Thursday’s sell-off. But let’s not underestimate the extent to which Europe’s ongoing sovereign debt crisis is responsible for the fear and panic spreading like wildfire throughout investor circles. Maybe it’s just as simple as this: The resolution of the debt ceiling ridiculousness cleared space for the world to focus on what’s going on in Europe. And now that we’re paying attention, we really, really, don’t like what we see. The parallels to the credit crunch of 2008 get stronger every day. Capitalism, having been denied the opportunity for utter self-immolation three years ago, is eating itself alive, again.

The full story of the European financial crisis is a tale as old as the entire project for European monetary and political union. Basically, it’s turning out to be extremely difficult for a group of nations to share a common currency without centralized control over fiscal and monetary policy or real political unity. The problem is exacerbated by a classic North-South divide. Thrifty Germans don’t want to bail out profligate Greeks. But German banks are on the hook for loans to Greece, so everybody’s stuck.

It’s been clear for a very long time that Greece’s financial situation was so bad that the country would eventually be forced to restructure its debt or default. The first tentative steps toward that restructuring came earlier this month. But as long as the sovereign debt problem was confined to relatively small nations like Greece or Portugal or Ireland, the actual cash necessary for a bailout that would ease the pain of default was considered manageable. As John Lanchester wrote in his excellent summary of the Greek mess earlier this summer, European monetary authorities “can write a check and buy the Greek economy, or the Irish economy or the Portuguese economy.”

But Spain is the world’s twelfth-largest economy, and the [European Central Bank] can’t just write a check and buy it. A Spanish default would destroy the credibility of the euro, and quite possibly the currency itself, at least in its current form.

The same goes for Italy, the world’s seventh largest economy. The big scary news this week is that “contagion” has spread from the little guy to the big. Bond investors are now questioning whether Italy and Spain can pay off their government debt. Rumors that Italy may be forced down the Greek path are flying through the markets. As a consequence, the yields that investors will accept for buying new Greek or Italian debt are rising sharply, which further raises government borrowing costs and makes Italy and Spain’s fiscal situation that much more disastrous. To complicate matters even more, the biggest holders of government debt in Europe are big Europeans banks, who are watching their own balance sheets deteriorate by the day.

The self-fulfilling and self-perpetuating aspects of this dynamic are obvious. Bond traders get nervous about government finances, and start pushing markets in directions that make government finances degrade further. And so on. When government leaders point this out, pledging their “sound economic fundamentals,” their self-serving avowals just act as another message telling traders to sell!

And suddenly, we see commentary like this, from the Wall Street Journal:

What was a battle to avoid a costly bailout has now become a push to avoid a doomsday scenario.

Sound familiar? A banking crisis, panicked speculators pushing markets into a self-sustaining downward cycle, a succession of patchwork responses by government that never seem to quite get a full handle on the situation … it’s 2008 all over again, except this time, we’re not merely wondering which Wall Street financial titan will be the next to topple, but instead are waiting to see which sovereign pillar of the global economy is about to join the hit list. Italy and Spain this week — France next?

The global economy can’t bail out economies of that size. Something will have to crack.

Today, that something was the U.S. stock market.