Friday 03.50 BST. Asian stocks tumbled as fears rose that the global economy may be heading for a recession with the European debt crisis spreading and the US economy slowing, enduring a heavy sell-off as investors shun risk after global central bankers failed to stem fears of rapidly slowing growth.

Following the biggest decline since the financial crisis for both the S&P 500 index and US Treasury yields, the MSCI Asia Pacific index dropped 3.8 per cent, down more than 10 per cent from its May peak. Japan’s Nikkei 225 Stock Average plunged 3.8 per cent to its lowest levels in more than four months. South Korea’s Kospi Composite index fell 3.5 per cent, plumbing its lowest intraday levels since March. Australia’s S&P/ASX 200 declined 3.8 per cent to a two-year low.

Investors are becoming increasingly concerned about the health of the global economy and worried that governments’ attempts to tackle fiscal difficulties – particularly in Europe as sovereign debt contagion spreads to Italy and Spain – will only exacerbate the slowdown.

“The past week’s market downdraft has been associated, above all, with growing evidence that the second-quarter global ‘soft patch’ is not giving way to a third quarter rebound as quickly as might have been hoped,” Barclays Capital said in a note to clients.

Investors are focusing on the US jobs report to gauge the state of the US economy. This week’s worldwide manufacturing and service sector surveys have shown waning activity and hopes are not high that Friday’s sentiment-setting US non-farm payrolls numbers will break the cycle of disappointing data.

“The US economy stands at the forefront of market concerns about growth. If the July employment report ratifies the view that the US recovery remains barely above stall speed, there is more selling to be done,” BarCap said.

In early Tokyo trading, the yen was moving upward again following heavy intervention on Thursday by Japanese authorities to drive down the yen from close to its post-war highs. It was trading at Y78.84 per US dollar compared to Y79.40 on Thursday. Against the euro it was at Y111.17 from Y111.27.

The South Korean won sank to a five-week low as fears of the global economy prompted foreign investors to pull funds from emerging markets. Top policymakers in Seoul are to hold an emerging meeting to discuss global economic and financial market situations.

In Sydney, the Australian dollar, which last week hit a near three-decade high against its US counterpart of just over US$1.1080, dropped heavily, falling as low as US$1.0438 on Friday as its six-day decline deepened. Investors were further unnerved after the Reserve Bank of Australia slashed its 2011 growth forecast for the nation to 2 per cent from its previous estimate of 3.25 per cent, blaming a slower-than-expected recovery in coal production after Queensland’s floods earlier this year, and weak consumer spending.

Measures of credit risk in Asia jumped the most in almost a year on Friday. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 11.5 basis points to 135 basis points, according to Bloomberg.

Oil futures fell more than 1 per cent to about $85 a barrel in electronic trading on the New York Mercantile Exchange, having dropped more than 5 per cent on Thursday. Gold moved 0.2 per cent higher to $1650 per ounce in Asian trading, remaining close to its record highs.

In Tokyo, shares of exporters took a beating with Sony down 3.5 per cent and Toyota Motor off 3.6 per cent. Weak corporate earnings also hurt sentiment. Pioneer, a maker of car navigation systems and audio equipment, slid 4.3 per cent after reporting a 51 per cent drop in net profit in the quarter ended June 30. Nippon Sheet Glass tumbled 6 per cent after revealing that operating profit in the first quarter slumped 44 per cent. Amada Corp bucked the trend, rising 2.9 per cent. The metal-processing machine maker, along with Aozora Bank and Sony Financial Holdings, will be added to the Nikkei 225 benchmark index.

In Sydney, concerns about the global economy pounded resources stocks with BHP Billiton off 4.1 per cent and Fortescue Metals Group down 6 per cent. Sentiment deteriorated after the Reserve Bank of Australia cut its economic forecasts for this year while raising inflation projections. Energy producers were lower as oil prices went into retreat with Woodside Petroleum off 5 per cent, Santos down 5.4 per cent and Oil Search 2.9 per cent lower. Fears of a global recession also sapped banks and retailers, with Macquarie Group plunging 7.4 per cent. Top lender National Australia Bank was off 4.1 per cent and Westpac slid 5 per cent. Retailer David Jones fell 6.1 per cent.

In Seoul, chemical stocks and shipbuilders were hit hardest with SK Innovation off 6.4 per cent and Daewoo Shipbuilding & Marine Engineering 7.8 per cent lower. STX Offshore & Shipbuilding tumbled 8.5 per cent.

China’s Shanghai Composite index shed 2.3 per cent as commodity producers, property developers and banks slid on fears of a double-dip recession in the global economy. China Vanke, the nation’s biggest developer by market value, was down 1.8 per cent and Poly Real Estate Group lost 2.5 per cent. Industrial & Commercial Bank of China, the world’s biggest bank by market value, declined 1.7 per cent and China Merchants Bank was down 2.1 per cent. Jiangxi Copper fell 3.1 per cent and Aluminum Corp of China dropped 4.1 per cent.

Hong Kong’s Hang Seng index was off 4.8 per cent as Cheung Kong shed 7.3 per cent and Hutchison Whampoa, Asia’s largest conglomerate by market capitalisation, sank 8.3 per cent. Li & Fung, a leading supplier to Walmart of the US, slumped 4.8 per cent and Cnooc, China’s biggest offshore oil producer by market value, slid 5.9 per cent. Clothing company Esprit Holdings sank 6.3 per cent.

Taiwan’s Taiex index plunged 4.3 per cent with Chimei Innolux, the world’s third-largest flat panel maker by sales, falling by the maximum daily limit of 7 per cent after it reported worse than expected quarterly losses and cut its capex budget.

In Indonesia, the Jakarta Composite was down 5 per cent with stocks declining across the board.

The turmoil in the markets was kicked off by a steep fall in the yen after Tokyo intervened on Thursday to weaken the currency in the latest move by a central bank to combat the impact of market turmoil. The falls were accelerated by news that the European Central Bank would return to the market to buy bonds issued by troubled debtor nations.

In spite of the extra liquidity those moves provided to markets, traders refused to break their focus on economic hopes that have been lowered by a combination of western government austerity, slowing global industrial production and a looming US jobs report.

“The ECB’s action may have helped solve short-term funding concerns but it offers no real solution to the debt crisis or the economy. That is pushing Treasuries higher and higher, and equities are cratering,” said Christian Cooper, head of dollar derivatives at Jefferies.

In overnight trading, the FTSE All-World equity index fell by 4.2 per cent, to its lowest level since December, while crude oil gave up six months of gains. Many of the major indices were in technical corrections, off more than 10 per cent from their 2011 peaks, including the S&P 500 index.

The S&P 500 index, led lower by a sharp fall in energy shares, dropped more than it did the first trading day after Lehman’s collapse, 4.8 per cent. It was the steepest one-day drop since February 2009, before the market bottomed in March of that year. The CBOE Volatility index, known as the “Vix” fear gauge, jumped 35 per cent to near 32, its highest since last June.

The decline was spearheaded by energy shares, who were responding to a 6 per cent drop in crude oil prices. The twin central bank actions have driven up the value of the US dollar, putting sharp pressure on crude prices and industrial commodities, as well as the companies that rely on those prices to meet their earnings expectations.

The sell-off in energy groups dragged down Brazil’s Bovespa index by 5.7 per cent, which along with Argentina’s Merval, down 6.1 per cent, led all major indices. The FTSE Eurofirst 300 fell 3.3 per cent as resource groups in particular endured heavy selling.

“We’re looking at a very weak economy that’s already had so much stimulus,” said Adam Parker, US equity strategist at Morgan Stanley. “When you sell energy and materials, you’re saying the chances of recession are going up.”

The dollar was up 1.7 per cent on a trade-weighted basis, while the yen dropped 2.7 per cent to Y79.07.

Industrial commodities’ benchmark copper fell 2.1 per cent. The sharpest decline in energy was in US WTI crude, down 6.1 per cent to $86.42 a barrel, its lowest since February. Brent crude was down 5 per cent to $107.60 a barrel.

Only gold sat out the rally, having already hit a new record of $1,681. It was later trading at $1,645, down 1 per cent on the session, although part of its weakness may have been due to selling pressure from people funding margin positions in energy.

Core bond yields continued to soften, with the 10-year Treasury yield falling to its lowest point since October 2010, at 2.41 per cent, a decline of more than 20 basis points. It was the biggest one-day drop in yields since February 2009. Ten-year Bunds offered just 2.31 per cent, a dip of 10 basis points.

Meanwhile, short-term rates went negative, as measured by one-month Treasury bills, thanks in part to an announcement by Bank of New York Mellon that it would begin charging fees for cash deposits, sending hundreds of billions of dollars into the market. US two-year yields have fallen to 25 basis points, a record low.

The sell-off of assets has been very broad based. Fund flow data from Lipper revealed that in the week leading up Wednesday, investors withdrew money from all equity and taxable bond funds for the first time since December. Bond flows broke a streak of 32 weeks of inflows.

Many investors are now looking to central banks to pick up the stimulatory baton once again. As part of its package to weaken the yen, the Bank of Japan also announced more quantitative easing, increasing its asset buying programme from Y10,000bn to Y15,000bn.

Jean-Claude Trichet, ECB president, implied in the post-decision press conference that further debt purchases would be made but did not say whether this would include the likes of Italian paper, which has been under pressure of late. Rome’s bond yields vacillated sharply and benchmarks were now 6.15 per cent. The euro was down 1.4 per cent versus the dollar to trade at $1.4133 after the ECB said it would boost liquidity in the bloc.

In one relative bright spot, Madrid was able to sell €3.31bn of three and four-year paper, against a maximum target of €3.5bn. The result was relatively well received by the market and Spanish benchmark 10-year yields fell 15 basis points to 6.1 per cent, reflecting a slight easing of tensions for some in the sector. The general market malaise has seen yields return to 6.3 per cent, however.

Additional reporting by Jamie Chisholm in London, Robert Cookson in Hong Kong and Peter Smith in Sydney