Efforts by US President Barack Obama and other global leaders to restore confidence failed to do the trick Tuesday as markets hit new lows in a massive sell-off driven by fears of a new recession.

European stock markets fell deeply into the red in morning trade, with early gains for some wiped out quickly and without mercy in near panic sales.

"We have now moved into an emergency phase of the eurozone debt crisis," ING debt strategist Padhriaic Garvey.

"The financial crisis has changed its nature and become even more vicious," Berenberg Bank chief economist Holger Schmieding added.

All the main markets were showing major losses, with London down more than four percent, Frankfurt slumping nearly six percent and Paris more than three percent.

Investors were now looking ahead to US Federal Reserve meeting later in the day in the hope the US central bank could come up with some fresh of cash to spur activity under its policy known as Quantitative Easing (QE) but many were sceptical it has any firepower left with which to stem the tide.

In Europe, a subject of growing concern was the debt ratings of Britain and especially France, which would be expected to make a major contribution to any increase in emergency lending to Italy and Spain, seen as most at risk.

"The thinking is if the US (rating) can be downgraded, then the likes of the UK and France could be next in the firing line," Garvey said. "The threat to the French (top) AAA rating is the most worrying."

Paris' finances would be seriously hurt too if the eurozone increased the size of its emergency fund, the European Financial Stability Facility (EFSF), which is too small to bail out Italy or Spain if they go the way of Greece, Ireland and Portugal.

Obama sought Monday to convince markets that an historic US downgrade by Standard & Poor's from the top rating of AAA to AA+ did not reflect the country's true state.

The US president stressed in a televised speech that the United States "always will be a triple-A country."

But on Wall Street, the Dow Jones Industrial Average fell 634.76 points -- its steepest one-day drop since late 2008 -- to close at 10,809.85, erasing all of its gains since last October.

Obama also spoke with Spanish Prime Minister Jose Luis Rodriguez Zapatero and Italian Prime Minister Silvio Berlusconi, calling for a united fight against a global economic slowdown.

"Zapatero and Obama agreed to maintain contact between the economic teams of both governments so as to continue coordination with the twin goals of promoting stability and avoiding a global economic slowdown," the Spanish premier's office said in a statement.

A day earlier the Group of 20 industrialised and emerging economies had also pledged to work together to restore financial stability and foster growth, which many economists stress is the ultimate solution to the crisis.

Few Asian markets were impressed by what Barclays Capital called "consoling words" however and most closed Tuesday with additional losses following steep drops the day before.

Tokyo gave up 1.68 percent while Hong Kong plunged 5.66 percent.

Seoul was down by 3.63 percent meanwhile though Taipei limited its losses and Shanghai managed to end the day essentially unchanged. Sydney staged a massive turnaround to end the day with a gain of 1.22 percent.

Berenberg's Schmieding said the US Federal Reserve was "probably heading for a new discussion about a third round of bond purchases," which markets are calling QE3, but did not expect an announcement on Tuesday.

"With agressive intervention, central markets can stop panics," he said, urging Fed chairman Ben Bernanke to disregard "objections from US hardliners" in the anti-tax Tea Party wing of opposition Republicans.

Meanwhile, European political leaders worked to obtain parliamentary approval for the terms of an emergency rescue plan agreed on last month but that could take several months and has roused opposition in several countries.

EFSF purchases of eurozone government bonds to ease market pressure on weakened countries and the European Central Bank, which had only reluctantly agreed to buy public debt, will not suffice if a big country like Italy or Spain needs help.

"The degree of intervention needs to be significantly larger" than the EFSF's warchest of 440 billion euros ($625 billion), Garvey noted, and Germany, the biggest eurozone donor, does not seem ready to boost it further.

Christoph Schmidt, an economic advisor to the German government, wrote Tuesday in business daily Handelsblatt that enlarging the EFSF was "unacceptable" and unnecessary.

He warned that "a constantly widening liability union through the back-door, whether through bond purchases by the European Central Bank or through the eurozone rescue fund, will be rejected by voters sooner rather than later."

Germany holds the key to funding of indebted eurozone countries, and in another Handelsblatt editorial, Thomas Hanke noted that Europe faced similar challenges in the late 1920s and said: "We don't have to make the same mistake again today."

He pressed Chancellor Angela Merkel to make the case to German voters, asking: "Is it so difficult for Mrs Merkel to explain that?"