)
World stocks fell and measures of investor risk aversion surged on Thursday on signs the US central bank may soon start scaling back the support measures that have been driving global assets higher.
Unexpected weakness in China's economy further fuelled the sell-off, which sent Japanese shares diving to their biggest one-day fall in two years, while data suggesting the euro zone economy shrank again in the second quarter also hit confidence.
"This is a critical period now for the markets. Investors have to adjust for the fact that the Fed's quantitative easing is not going to support the equity markets for an unlimited period," said Nick Beecroft, senior market analyst at Saxo Capital Markets.
MSCI's world equity index lost 1.7% on Wednesday, over one-tenth of this year's gain and on course for its biggest daily fall of the year.
Stocks have soared as a wall of central bank money has coursed around the global financial system seeking returns. The prospect of the world's most important central bank slowly turning the taps off could mark a profound turning point, although its officials have been at pains to stress that no action is likely for months yet.
Shares began to reel late on Wednesday after Federal Reserve chief Ben Bernanke told Congress that if economic improvement continued, the Fed "could in the next few meetings take a step down in our pace of purchases".
The selloff extended to Wall Street, which opened broadly lower for a second day after Japan's main Nikkei share index slumped 7.3% and European shares slid from a nearly five-year high hit on Wednesday.
The Euro STOXX 50 Volatility Index, Europe's widely used measure of investor risk aversion, surged 18% to a three-week high. The CBOE Volatility Index, or VIX, meanwhile jumped 8% in early New York trade indicating growing anxiety about the outlook for stocks.
The twin fears about global growth and the steady withdrawal of US stimulus sent oil prices lower, and hit copper and other industrial metals.
Concern the Fed will wind down its stimulus initially took its toll on bonds, but the scale of investors' sales of equities saw money flow into the safest government debt, driving yields on US Treasuries and German Bunds down from their highs.
Demand for riskier euro zone debt softened although bonds remained underpinned by expectations the European Central Bank may yet ease monetary policy further. That would contrast with any tightening by the Fed but follow a massive stimulus package launched by the Bank of Japan.
"Whilst a slowing of QE is possible in a few months we can't help (but) think that the Fed could be forced to restart its QE in a beggar-thy-neighbour environment where central banks in most parts of the developed world are still largely on an easing bias in order to steal a share of the global GDP," Jim Reid, strategist at Deutsche Bank said in a research note.
"We think QE or derivations thereof will be around for many years to come."
