Japanese stocks fell in early trading before recovering somewhat, after markets around the world dropped sharply on Monday.
The Nikkei index approached a 26-year-low as bank shares reacted to record losses from US insurance giant AIG.
Rattled by fears that turmoil in the financial sector is far from over, the Dow Jones fell below 7,000 points for the first time since 1997.
The FTSE 100 briefly hit a six-year low and European markets also fell sharply.
The benchmark Nikkei came within 100 points of hitting the 26-year-low of 6,994.90 in the first hour of trade before recovering slightly to 7,204.89 by mid-day.
Confidence was hit by a fresh $30bn bail-out of US insurance giant AIG following a record $62bn loss, and by HSBC's plans to raise £12.5bn.
The Dow Jones fell by 4.2% to end at 6,763, the lowest closing level since April 1997.
The broader Standard & Poor's 500 index was down 4.7% at 701, briefly falling below the 700 level for the first time since October 1996.
AIG reported a loss of $61.7bn for the final three months of 2008 - the largest quarterly loss in corporate history - and said it would receive an extra $30bn from the US government as part of a revamped rescue package.
“ Unless markets overseas stop falling there's nothing we can do, no matter how hard we try ”
Yutaka Miura, Shinko Securities
AIG has already received $150bn in financial support - the biggest bail-out by far of any US company.
The Federal Reserve and the Treasury said that AIG posed a "systemic risk" to the global financial system.
"The potential cost to the economy and the taxpayer of government inaction would be extremely high," they said.
Japanese analysts said talk in Tokyo of a fresh government stimulus plan would be unlikely to help pick up the stock market.
"Unless markets overseas stop falling there's nothing we can do, no matter how hard we try," said Yutaka Miura, an analyst at Shinko Securities.
HSBC said the £12.5bn it is seeking to raise from shareholders to both shore-up its balance sheet and to grow through "targeted acquisitions".
The bank also said pre-tax profits for 2008 were $9.3bn (£6.5bn), down 62% on the previous year after it wrote down the value of US assets by more than $10bn.
"The big issue [for markets] is the fact that HSBC - one of the biggest and strongest banks around - is having such problems," said Jonathan Jackson and Killik & Co.
"It's difficult to see any trigger for an upturn in the short term," he added.
Weak manufacturing figures in both the UK and eurozone also placed downward pressure on European markets.
By the end of Monday's trading, the UK's FTSE 100 was down 5.3%, Germany's Dax was 3.5% lower and France's Cac 40 had lost 4.7%.
Asian markets were also down on Monday, with the Nikkei shedding 3.8% to close at 7,280.15 while Hong Kong's Hang Seng index dropped 3.9%.
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Published: 2009/03/03 04:10:31 GMT