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Economic conditions whipsaw investors worldwide

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LONDON (AP) — Concerns over the financial health of Europe's banks and the state of the U.S. economy sent stocks sharply lower Tuesday, a day after the Federal Reserve's pledge to keep extremely low interest rates for two more years temporarily calmed market jitters.

Shares in French banks took a particular pummeling in mid-afternoon trading on the Paris stock exchange on renewed market worries over France's bond rating and the European debt crisis. French bank Societe Generale's shares plunged more than 20 percent at one point, while stock in BNP Paribas was off nearly 10 percent and Credit Agricole fell more than 14 percent.

Investors were fleeing French bank shares despite reassurances from government officials and rating agencies that France's triple A credit rating is not under threat.

Despite the Fed's surprise announcement Tuesday that it would likely keep its Fed funds rate at near zero percent through 2013 to help the ailing U.S. economy, stocks have taken another pounding. Any euphoria at Tuesday's close more than vanished as investors fretted about the global economy and the banking system, particularly Europe's.

It wasn't just French banks in the firing line. All Europe's major banks were facing massive selling amid fears over their exposure to government debt. Commerzbank AG said earlier it was taking a $1 billion or so writedown from its exposure to Greek debt.

In Europe, the FTSE 100 index of leading British shares was down 2.6 percent at 5,026, while Germany's DAX fell 3.4 percent to 5,716. The CAC-40 in France was 4.1 percent lower at 3,047.

In the U.S., the Dow Jones industrial average was down 3.4 percent at 10,857, while the broader Standard & Poor's 500 index fell 3.4 percent to 1,132.

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 1.3 percent at $1.4185.

In the oil markets, prices fell from earlier highs as stock markets turned lower again. Benchmark oil for September delivery was up $1.78 to $81.25 a barrel in electronic trading on the New York Mercantile Exchange. Earlier oil prices had risen to $82.