WIDESPREAD panic swept across world markets yesterday as the near-collapse of a troubled German lender ignited fears of a global financial meltdown.

The extraordinary sell-off sent bourses into freefall as fearful investors stampeded out of banks and property stocks.

Asian markets started the rout by falling between 4 and 5 per cent but the real blood-letting came when Europe opened for business.

London, Paris and Frankfurt were down 7 to 8 per cent throughout the day, while trading in Moscow was halted after stocks dived a staggering 15 per cent.

By the closing bell, European bourses had collectively registered their worst one-day percentage fall on record.

'It's like a fire,' said Mr Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris.

'People have decided that markets have no ability to repair themselves and politicians have control of this process,' said strategist John Haynes at Rensburg Sheppard Investment Management. 'The buyers have stepped away, and the sellers are still there.'

As pessimism deepened in Europe, the euro suffered its biggest one-day drop against the yen and hit a 14-month low against the US dollar. Oil fell below US$90 a barrel.

The gloom spread across the Atlantic where US markets plumbed new lows. At one point. the Dow was almost 600 points lower, dipping below the 10,000-point barrier to fresh five-year lows.

Stocks briefly pared losses after the Federal Reserve doubled its emergency auctions of loans to commercial banks to as much as US$900 billion (S$1.3 trillion). But at 1.15am Singapore time, it was still down 554 points.

Yesterday's sell-off had been building up since Friday night and Wall Street's negative reaction to the passing of the US$700 billion bailout, but the panic was triggered by events in Europe.

A lengthening list of bank failures there brought home to investors the frightening fragility of many financial systems, not just those in the US.

'Investors are realising that European banks are not any better off than those in the United States,' said JP Morgan Private Bank's senior portfolio manager, Mr Elan Cohen.

What confused and spooked many investors was the scatter-gun approach taken by European governments to tackle their credit crises.

Germany, for example, moved to guarantee personal savings deposits and work out a fresh ¥50 billion (S$100 billion) deal to save lender Hypo Real Estate after an earlier rescue plan failed.

Meanwhile, Holland nationalised the Dutch businesses of Fortis while France's BNP Paribas said it would take control of its Belgian banking and insurance units.

A joint statement by European leaders last night pledging to protect depositors from losing their savings and to support the financial system failed to stem the free-fall in bank stocks.

Given the profusion of European banks in Asia, there were concerns in Asia that regional financial institutions would be caught in the collateral fallout.

'Fortis, Deutsche Bank and BNP Paribas are familiar names in Raffles Place while US banks like Washington Mutual and Wachovia are not,' said Singapore remisier Thomas Lee.

This explained why the bank turmoil in Europe was igniting concern here, and causing market sentiment to deteriorate at a pace that left market experts gasping.

Singapore's Straits Times Index (STI) plunged 128.8 points, or 5.6 per cent - its biggest one-day loss since January - to close at a three-year low of 2,168.32.

The one-day fall wiped out all the gains the STI made in its laborious one-year climb from June 2005 to June 2006.

It was a similar story across the region. Hong Kong's Hang Seng sank 4.97 per cent, while China's Shanghai Composite Index lost 5.2 per cent and Japan's Nikkei-225 Index was down 4.3 per cent. The Osaka exchange slumped a whopping 9 per cent.

Many market observers are now wondering if Asian banks can escape unscathed as the fallout of the US financial crisis spreads around the world.

Merrill Lynch economist T. J. Bond believes that while the risks are rising, the region will be cushioned by its high savings rates and lower levels of debts.

The key stabilising factor is China, with foreign reserves of US$1.8 trillion.

Mr Bond noted that to contain the fallout, China was likely to repeat the same formula of delivering stable economic growth as it did 10 years ago during the Asian financial crisis.

'About 90 per cent of China's GDP (gross domestic product) is domestic demand,' he noted.

For the moment, however, no one is betting on any sort of revival.

'It's just in free fall. The outlook is still very bearish and we are nowhere near the bottom,' said technical analyst Nicole Elliott at Mizuho Securities.

'There is no reason to buy anything at the moment.'

engyeow@sph.com.sg

With additional material from Reuters and Bloomberg