TSX and Dow erase 2011 gains

Stock markets tumbled Thursday over worries that the U.S. economy might fall back into recession and the possibility that Europe's debt crisis might spread to larger economies.

In Toronto, the S&P/TSX composite index returned to levels it last saw in October, closing with a loss of 435.90 points, or 3.4 per cent, at 12,380.13. It fell as much as 490 points during the session.

In New York, the Dow Jones industrial average was down 512.76 points, or 4.31 per cent, to 11,383.68, the Nasdaq fell 136.68 points, or 5.08 per cent, to 2,556.39, and the S&P 500 was lower by 60.27 points, or 4.78 per cent, to 1,200.07.

The Dow is now down more than 1,200 points since July 21 and has fallen for nine of the last 10 days.

The Canadian dollar closed down 1.80 cents US to 102.09  as investors piled into the U.S. dollar following a move by the Bank of Japan to control the rise of the yen by intervening in markets to sell its currency and buy the greenback.

Japanese Finance Minister Yoshihiko Noda said Japan was concerned the strong yen could hurt the country's export-dependent economy.

Large investors have moved so much money into cash accounts at Bank of New York that on Thursday the bank said it would begin charging some clients a 0.13 per cent fee to hold their cash.

"In the past month, we have seen a growing level of deposits on our balance sheet from clients seeking a safe haven in light of the global interest rate and credit environment," the bank said in a statement.

Bank of New York clients include pension funds and large investment houses.

"Investors are deciding that now is the time to take risk off the table," said Brian Gendreau, market strategist for Cetera Financial Group.

On Wednesday, the Swiss National Bank cut its main interest rate to a range of zero to 0.25 per cent from zero to 0.75 per cent to halt a sharp rise in the franc.

Investors have become increasingly worried about the possibility of a U.S. recession as data on factory orders and activity in the manufacturing and service sectors suggest the economy continues to struggle.

"It has now become completely about the economy," said Sid Mokhtari, market technician at CIBC World Markets. 

"The evidence suggests there is now the risk of a serious economic slowdown."

The key piece of economic news this week will likely be Friday's U.S. jobs report for July. Economists expect it will show that 90,000 jobs were created last month and that the unemployment rate was unchanged at 9.2 per cent.

"If numbers are in line or below what the consensus is, I think we will see the selling pressure continue," Mokhtari added.

'The evidence suggests there is now the risk of a serious economic slowdown' —Sid Mokhtari, CIBC World Markets

"[If] it's better, above estimates, it's reasonable to say that maybe we can set the tone a little bit better. But having said that, you need about a month or so to get another round of numbers coming at us before we can put a bottom to this thing."

Canadian jobless figures for July will also be released on Friday and economists expect they'll show about 20,000 jobs were created.

Gold gave back earlier gains Thursday, with the December contract closing down $7.30 at $1,659.00 US an ounce.

Oil — Canada's biggest commodity export — fell to its lowest level since February, with September crude down as much as $5.46, or 5.9 per cent, to $86.47 US per barrel on the New York Mercantile Exchange. It closed down $5.30, at $86.63.

European markets headed lower as European Central Bank head Jean-Claude Trichet refused to say whether the bank is propping up Spanish and Italian bonds to quell debt market turmoil.

Trichet says bond-buying still on

Trichet said "downside risks may have intensified" and that there are "renewed tensions in some financial markets in the euro area." He said the central bank has decided to provide more liquidity.

"You will see what we do," he said after the bank kept its main interest rate unchanged at 1.5 per cent.

At the same time, the president of the European Union's executive, Jose Manuel Barroso, said that the 17-country eurozone needs to make further changes to its bailout fund, including boosting its size, to ensure it can effectively stem the worsening debt crisis.

London's FTSE 100 index and Frankfurt's DAX each fell 3.4 per cent, while the Paris CAC 40 fell 3.9 per cent.

In Asia, Tokyo's Nikkei 225 index closed up 0.2 per cent, Hong Kong's Hang Seng shed 0.5 per cent, while China's Shanghai Composite Index advanced 0.2 per cent and South Korea's benchmark Kospi dropped 2.3 per cent.