World Stocks Fall; EU Debt Crisis Flares

Updated from 5:17 a.m. EDT LONDON -- World stock markets slid Wednesday amid new concerns about European banks' exposure to risky debt and as the yen's rise to a fresh 15-year high against the dollar weighed on Asian exporters.

The mood among investors was downbeat a day after the Wall Street Journal reported European Union stress tests of 91 banks in July understated some lenders' holdings of potentially risky debt.

"That is another negative driver of sentiment," said Jackson Wong, investment manager for Tanrich Securities in Hong Kong. Investors were also locking in profits after some gains last week, he said.

Fears that the global economic recovery was rapidly losing momentum appeared to ease last week but the respite has proven to be short-lived with Europe's debt crisis threatening to flare up again.

By late morning in Europe, Britain's FTSE 100 was down 0.7% to 5,367.78 while Germany's DAX was off 0.8% at 6,071.09. France's CAC-40 declined 0.7% to 3,616.84.

Financial stocks were among the hardest hit, with Deutsche Bank (DB) down 2.7 %, Barclays(BCS) 3.3 % and Societe Generale 2.9 %.

Amid worries that some banks' exposure to bad government debt could be larger than previously estimated, borrowing costs for some countries rose. Eyes will turn to Portugal, which is scheduled to sell bonds Wednesday.

The euro hovered around $1.2685, about the same as in New York trading late Tuesday.

In Asia, market sentiment was dominated by the spike in the yen's value and the toll it takes on exporters. Japan's benchmark Nikkei 225 stock index dived 2.2% to 9,024.60. A strong yen hurts Japanese companies like Toyota(TM) and Sony(SNE) as it cuts their overseas profits and threatens to derail the country's fragile economic recovery.

The dollar edged up to 83.77 yen from 83.74 yen the day before after falling as low as 83.32 earlier.

China's benchmark Shanghai Composite Index shed 0.1% to 2,695.29 amid fears of new property curbs and Hong Kong's Hang Seng index lost 1.5% to 21,088.86.

Investors worried that Beijing might impose new curbs to cool the housing market ahead of the peak sales season of September and October, analysts said. That may include halting mortgage discounts and loans to developers.

"Heavyweights, including banks and real estate stocks, remained sluggish, because it is unclear where the government policies are heading," said Li Jun, an analyst for Central China Securities in Shanghai.

On Tuesday, the Dow Jones Industrial Average dropped 1 %, to 10,340.69.

Benchmark crude for October delivery was down 42 cents at $73.67 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 51 cents to settle at $74.09 on Tuesday.

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