Britain's FTSE 100-index dropped sharply at the start of business, returning after Monday's public holiday, to touch a low of 5,090.2, its lowest since January 13. Market talk focused on whether the sharp falls were a temporary dip or the start of a longer-lived bearish phase. ``We can't call this a correction any more, we are emphatically in a bear market,'' said Michael Derks, strategist at investment bank Nomura, in a Reuters Television interview.

Marketlosses have raised speculation that central banks may try to restore stability by cutting interest rates, though few expected a cut in the immediate term. ``Markets need an indication on interest rates around the world, that's the great white hope here but you won't see that coming today,'' said one investment strategist. The global flight into safe haven bonds saw German bunds and British government gilts rise sharply, following an overnight jump in US treasuries.

German analysts said they were bracing for a sharp drop in the Xetra DAX index over the day, but with S&P futures pointing to a possible rebound on Wall Street later, prices began to recover a little after the initial falls.

It was a similar story in Asia where Tokyo's key Nikkei 225 average bounced back to close 1.86 per cent higher after losing more than 3 per cent at one point. Traders said the rebound was a technical one and some analysts forecast renewed selling would soon kick in once more. The 512 point plunge in the Dow Jones wiping6.37 per cent off the value of leading US stocks was mostly triggered by selling by big financial institutions. As selling accelerated in the final hour of trading, analysts said fear of being left behind outweighed fundamental concerns about instability in Russia and its spillover effects on Latin America.

Some European analysts cautioned against predicting, too, heavy a decline in shares, with the futures contract on the US S&P 500 index already suggesting a possible Wall Street rebound later. In currencies, the dollar recovered some of its losses in European morning trade after it was driven down overnight to a nine-month low against the mark and a one-month low against the yen. The market had rushed to sell dollars after US shares slid, exacerbating fears the emerging markets turmoil would take a heavy toll on the United States. Traders noted dollar-buying in Europe, adding that the market had gone too far in dumping dollars overnight.

``There's a bit of a knee-jerk reaction to the overnight sell-offin the dollar. People in Europe are starting to think the dollar's oversold at this level,'' said Neal Kimberley, manager at Bank of Tokyo-Mitsubishi in London.

The dollar's overnight low against the mark was at 1.7399. Traders said there was not much liquidity in early trade, with many loath to take up large positions in the dollar. The market was somewhat reassured by US Treasury Secretary Robert Rubin's reminder overnight that the US economy was enjoying good health despite the turbulence hitting financial markets around the world.

Rubin said the world was working its way through a difficult period but that US economic fundamentals were good, with strong prospects for growth, low inflation and low unemployment. But sentiment in the dollar was still shaky, and traders were keeping a close eye on European stocks. The dollar also fell against the Swiss franc to 1.4270 francs, the seven-month low it also reached on Monday. But it had rebounded to 1.4416 by Europe's morning.

The Swiss franc made the mostof its safe-haven status and rose to a five-month high against the mark late on Monday, helped by the Russian parliament's decision to vote down Viktor Chernomyrdin as prime minister.

Dow's losses wipe off $3 trillion

About $ 3 trillion dollars, which is equivalent of Germany's economy, have gone up in smoke on Wall Street in the last five weeks, estimates from the New York Stock Exchange (NYSE) and the Nasdaq said. The Dow Jones Industrial Average (DJIA) tumbled 512.61 points or 6.36 per cent to 7,539.07 on Monday, erasing gains for the year and falling to its lowest level since last November.

For the 30 Dow stocks, the losses amounted to $ 2.24 trillion since July 17, when the index hit a record high of 9,337.97 points. On Nasdaq, dominated by high-tech stocks, the losses amounted to $ 588 billion since its record high set on July 20.

The Nasdaq composite, off 20 per cent since its record, suffered its worst point drop ever -- 140.43 points or 8.56 per cent -- bringing it to its lowest levelsince July last year.