NEW YORK - World stock markets dived for a second day running on Friday with investors worldwide dumping shares on fears of a widening economic crisis caused by a global credit crunch. However, the US market pared back heavy losses in a late rally, with the Dow closing a modest 0.23 percent lower after the Federal Reserve injected 38 billion dollars into the banking sector in a bid to ease investor anxiety.
Earlier the London market slumped nearly 4.0 percent and Asian exchanges lost between 2.0 and 4.0 percent.
"It's that unnerving effect of the unknown which is spooking investors at the moment," said analyst Henk Potts of Barclays Stockbrokers in London.
Economists said investors were alarmed by signs that losses in the US sub-prime mortgage market -- high-risk property loans to which many US banks and investment funds are exposed -- is spreading to other regions.
BNP Paribas, France's biggest bank, spooked the market on Thursday when it said it had suspended three investment funds exposed to the US housing market because it was unable to value the assets.
That led to heavy falls for banking stocks, which continued into Friday.
"Investors don't know which banks have got exposure (to the credit problems) and the extent to those potential losses," said Potts.
But he added: "We suspect that the underlying picture is more positive than the knee-jerk reactions that we have been seeing in terms of the (stocks) sell-off for the last couple of sessions."
Meanwhile, news that the US, eurozone, Japanese and other central banks had pumped massive amounts of cash into the banking sector to counter declining liquidity appeared to only add to many investors' jitters.
The European Central Bank said it had injected another 61.05 billion euros (83.5 billion dollars) into the eurozone banking market on Friday after a record injection of 94.8 billion euros on Thursday.
The Federal Reserve pumped in 38 billion dollars into the US banking system and said it was ready to inject more money if necessary.
"This is an important symbolic move that helps provide temporary liquidity to the financial markets, but won't solve the root problem or end the fears about ongoing problems in the credit markets," said Briefing.com analyst Dick Green.
If the central banks' actions aimed to reassure investors, "they took it the other way ... That is, that the problem is so big that the central banks had to intervene," said Okasan Securities strategist Hirokazu Fujiki.
At the close in Europe, the FTSE 100 in London was down 3.71 percent, the the CAC 40 in Paris fell 3.13 percent and in Frankfurt the Dax lost 1.48 percent.
The Dow Jones Industrial Average ended 0.23 percent lower at 13,239.54, after losing more than 200 points in the morning, and the tech-rich Nasdaq composite fell 0.45 percent to 2,544.89.
The broad-market Standard & Poor's 500 index closed essentially flat, up 0.55 point (0.04 percent) at 1,453.64.
The overriding fear of investors is that banks will tighten their borrowing terms in response to the sub-prime crisis to prevent further exposure and cover losses already incurred.
If liquidity is limited to such an extent that companies and consumers have inadequate access to credit, that could dampen overall economic growth.
"As private-sector banks, in a time of uncertainty, set aside more funds for their own funding needs, we are seeing a shortage of liquidity in the money markets," said Societe Generale's chief Asia economist, Glenn Maguire.
This was the reason the European Central Bank and other central banks around the world were pumping money into the banking sector, analysts explained.
In Asia, the benchmark Nikkei-225 index in Tokyo slumped by as much as three percent at one point on Friday before ending down 2.37 percent at 16,764.09 points, the lowest closing level for almost five months.
Seoul ended down 4.2 percent, Sydney slumped by 3.7 percent, Hong Kong slid 2.88 percent, Mumbai was down 2.65, Singapore gave up 3.31 percent and Taipei lost 2.74.
Chinese share prices edged only 0.10 percent lower Friday, boosted paradoxically by gains to heavyweight banking stocks.
Maguire of Societe Generale noted that global stock markets had already been rattled this year after the Shanghai stock market plunged in February.
"The falls we've seen on Wall Street and Asia are consistent with what we saw on February 27 when the Asian equity markets plummeted on the back of China (problems) and we have seen markets recover from that," he said.
But he added: "We need to see confidence stabilize in the banking sector and the financial markets first before we see things start to improve." - AFP /ls
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