Fears about out-of-control government debt on both sides of the Atlantic swept across financial markets again on Monday, knocking stocks sharply lower and pushing up prices of bonds deemed to be safe havens.
As fears about Italy and other debt-strapped euro zone countries persisted with Moody's warning about France's rating outlook and Spanish yields rising a day after the country voted in a new government, attention also turned to the United States, where a bipartisan "super" committee looks set to miss a deficit reduction deadline.
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"Europe is not the only one with debt problems ... in the United States there's a political gridlock," said David Thebault, head of quantitative sales trading, at Global Equities.
Fears that U.S. lawmakers will fail to agree a plan to cut the nation's deficit sent U.S. crude oil down more than $2 on Monday while Brent crude fell more than $1 to $106.5 a barrel.
Rating agency Moody's meanwhile said a rise in French government debt yields and weaker growth prospects could be negative for the outlook on the country's credit rating.
Worries that France has the weakest economic fundamentals among the euro's six AAA-rated countries have drawn the euro zone's second-largest economy into the firing line in the debt crisis this month.
World stocks as measured by MSCI were down 1 percent for a more than 11.5 percent year-to-date loss. More volatile emerging market stocks lost 1.9 percent.
In Europe -- the heart of the debt storm -- the FTSEurofirst 300 index tumbled 2.1 percent to a six-week low and was sitting more than 17 percent lower for the year.
Japan's Nikkei average fell to its lowest closing level since March 2009 as the U.S. debt worries added to concerns about the euro zone.
Sources in the United States said the bipartisan deficit-reduction committee would announce that they failed to meet their deadline to find $1.2 trillion in budget cuts over the next decade.
"Tomorrow could be scary, if the U.S. misses its deadline," Yutaka Miura, senior technical analyst at Mizuho Securities.
On euro zone sovereign bond markets, spreads between troubled countries' and core German bonds yields widened. This included Spain, where the centre-right won an overwhelming general election vote.
Despite the widening spreads, 10-year Italian bond yields rose slightly but were below the key 7 percent level reached last week. Plus-7 percent yields have in the past signalled countries need for a bailout.
Investors were favouring German debt as the safest bet in the current climate, but there were still concerns.
"Bunds didn't trade well last week, but a lot of that was a move out of anything European," said one trader.
"Nothing's really changed and liquidity is getting progressively worse. It feels like year-end is going to be particularly bad and that will just exaggerate moves either way."
The euro fell to a six-week low versus the Japanese yen -- seen as a safe haven.
It was also 0.4 percent down against the dollar at $1.346 . As the dollar firmed, the price of gold fell more than 1 percent to as low as $1,704.69 an ounce on worries about government debt in Europe and the United States.