A warning of tough times ahead by Fed Chairman Ben Bernanke sent global markets sharply lower, with Tokyo shares tumbling 10 per cent on Thursday, as investors brace for looming recession.

Shrugging-off recent optimism about massive government efforts to prop up the global financial system, investors fled from stocks, commodities and other risky assets to the relative safety of cash.

The biggest monthly decline in US retail sales in more than three years added to the gloom, with the price of oil falling to a new 13-month low below $73 on fears of a collapse in demand.

In Japan, a Reuters poll showed manufacturing business sentiment hit a six-year low in October, in yet another sign the world's second biggest economy teetering on the brink of recession.

"It is shocking to see how quickly the temporary relief - following recapitalization of banks by governments and other measures fizzled out," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong, in a morning note.

"Damage to the real economy has already been done and has been so extensive that at least a deep global recession will take place," he said.

Third quarter earnings reports that began trickling in, reflected the damage.

US bank JPMorgan Chase said its profit plunged 84 percent, while Wells Fargo & Co reported a 25 percent drop in earnings.

Asian stocks outside of Japan dropped 6 percent after Wall Street suffered its worst one-day percentage declines since the stock market crash of 1987. The Dow Jones industrial average ended down 7.87 percent, and the S&P 500 index lost 9 percent.

"Last week people were panicking over the financial system, nobody really knew what would happen. But now it's the real economy," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo.

Bernanke warned that credit market turmoil posed a "significant threat" to an already weak economy. "By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said.

Suggesting US Federal Reserve's openness to further interest-rate cuts, Bernanke said concerns about inflation were diminishing. He said it would take time to restore normal flows of credit.

The US Securities and Exchange Commission, which has clamped down on short-selling in response to violent swings in the market, late on Wednesday said big investors will be required to disclose their short positions under a new interim rule.

France, Germany and Britain called for leaders of the Group of Eight major industrialised countries to gather next month with the heads of emerging economies to consider a radical overhaul of the world's 60-year-old financial architecture.

The White House said G8 leaders were expected to meet this year on the worst financial crisis since the 1930s Great Depression.

Governments around the world have pledged $3.2 trillion in emergency measures -- roughly an equivalent to the economic output of Germany or China -- including taking stakes in banks to help them stabilise, rallying world markets on Monday and Tuesday.

But optimism quickly gave way to fears that government intervention would not save major economies from recession.

Fed Vice Chairman Donald Kohn said latest readings on the US economy have become more downbeat and the impact of a recent emergency interest rate cut had been "overwhelmed" by escalating mistrust among financial institutions unwilling to lend to one another.

The US housing market has yet to hit bottom, and inventories of unsold homes are likely to remain high, Kohn said. It was probable the economy would remain "subpar" well into next year, gradually improving in late 2009 and 2010, he said.

As stocks around the world plunged, t