Global stocks fell further on Thursday on concerns about a looming fiscal crisis, while the euro fell to a two-month low after the European Central Bank refrained from taking more action despite signs of further economic slowdown.
U.S. lawmakers' pledges to avoid the "fiscal cliff" - some $600 billion in automatic tax hikes and spending cuts due in January - did little to dispel persistent doubts as to whether Congress can agree on a timely compromise.
Fears that the world's biggest economy may suffer a recession in 2013 as a result of a sudden fiscal adjustment led stocks and crude oil prices to fall sharply on Wednesday and the slide continued on Thursday.
"This gridlock adds to the uncertainty for markets. It shows the difficult problems Washington faces won't get fixed any time soon," said Daniel North, chief economist at Euler Hermes ACI in Owings Mills, Maryland.
However, U.S. stocks stabilized Thursday morning partly on news of a rise in U.S. exports and a bigger-than-expected drop in jobless benefit claims, though the data was distorted by the storm that disrupted life in U.S. Northeast in the past week.
On Wall Street, the three major U.S. stock indexes reversed their slight gain after a flat opening. Their decline accelerated in early afternoon trading, prompted by investors socking more money into bonds from stocks, analysts said.
The Dow Jones industrial average was down 56.69 points, or 0.44 percent, at 12,876.04. The Standard & Poor's 500 Index was down 9.31 points, or 0.67 percent, at 1,385.22. The Nasdaq Composite Index was down 27.79 points, or 0.95 percent, at 2,909.50.
Whole Foods Market Inc reported income that matched forecasts, but shares of the biggest U.S. natural and organic grocery chain fell 5.1 percent to $91.01.
On Wednesday, the S&P 500 stock index suffered its biggest one-day percentage drop since June, and the Dow closed at its lowest since early August.
The FTSE Eurofirst 300 index of top European shares closed down 0.15 percent at 1,097.71 on Thursday, the lowest level in a week.
FTSE component Siemens
The MSCI world equity index was down 0.7 percent at 324.64 after Tokyo's Nikkei lost 1.5 percent.
The ECB left its key interest rate at 0.75 percent, disappointing some traders who had bet on more policy easing in the wake of recent comments by ECB President Mario Draghi on the weak economic outlook and gloomy European Commission growth estimates.
The Bank of England also left its key rate unchanged, at 0.5 percent.
The absence of more ECB action spurred selling in the euro, knocking it down to a two-month low versus the U.S. dollar at $1.2719. It last traded at $1.2739, down 0.25 percent for the day.
The euro had been under pressure before the ECB rate decision, even though the Greek parliament approved in the early hours of Thursday an austerity package needed to unlock international aid and avert bankruptcy, defying political rifts and violent protests.
"The euro will continue to weaken because there is no recovery in sight for Europe and the rest of the world continues to slip," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.
Meanwhile, Spain, another heavily indebted euro zone member, sold 4.8 billion euros of new debt, completing its cash needs for this year. This means Madrid can hold out longer before asking for international aid.
The somewhat encouraging news in Europe curbed safe-haven bids for U.S. and German government debt, but persistent unease about the region's debt woes and the gridlock in Washington deterred any meaningful selling in bonds.
The benchmark 10-year U.S. Treasury note rose 4/32 in price to yield 1.628 percent, down 2 basis points from late on Wednesday after the strong 30-year bond auction, while German Bund futures were up 28 basis points at 143.02, near their session highs.
In commodity markets, crude oil retreated from its session highs after tumbling more than $4 a barrel on Wednesday on concerns about weak demand for fuel as the U.S. and European economies face the risk of a protracted slowdown.
Brent crude was flat at $106.82 per barrel after falling nearly 4.0 percent on Wednesday, its steepest drop since December. It rose as high as $108.17 earlier.
U.S. crude rose 65 cents to settle at $85.09, after losing nearly 5 percent in the previous session, also its biggest slump since December.
Gold was on track for a fourth straight days of gains on safe-haven bids due to worries about the U.S. fiscal cliff and Europe's debt crisis. Spot bullion was up 0.79 percent at $1,729.90 an ounce.
