A global market rout sent shares tumbling across the region yesterday as Dubai stocks hit a seven-year low and the Egyptian bourse closed at its lowest in more than two and a half years.
The outbreak of deadly clashes between protesters and police in Egypt added to financial woes on both sides of the Atlantic as fresh doubts emerged about the ability of European and US policymakers to resolve their debt crises.
"We have two big stories at the moment - the ongoing issues in Europe and the deficit reduction in the US and both are driving more risk-off," said Paul Day, the chief strategist and broker at Market Securities in London.
While the euro-zone debt crisis remains a focus of market concerns, attention is expected to increasingly shift this week to the US, where a bipartisan supercommittee is expected to miss a deadline for trimming US$1.2 trillion (Dh4.4tn) from government spending over the next decade.
The Dubai Financial Market General Index dropped 0.8 per cent to 1,355.18 points, a level not seen since June 2004. In Egypt the EGX 30 fell 4 per cent to its lowest close since March 2009 as thousands of protesters poured into Tahrir Square in the third day of violence.
Yesterday, in a further sign of how the European troubles are increasingly risking infecting the euro zone's core, Moody's warned rising debt yields in France and slowing growth on the continent could harm its ratings outlook.
In Germany, the central bank lowered the country's growth forecast.
Economic output would expand by between 0.5 per cent and 1 per cent next year, the Bundesbank said. The forecast was down from its prediction in June of 1.8 per cent.
The Stoxx Europe 600 was down 2.4 per cent to 226.54 points during afternoon trading.
Earlier in the day, the MSCI Asia Pacific Index fell 1.4 per cent.
Global stocks as measured by MSCI have lost more than 10 per cent of their value this year.
In the euro zone, fresh evidence of the strain the debt troubles were causing emerged in the bond markets.
Yields widened on Spanish bonds to 6.56 per cent as the country shared the spotlight in the turmoil. It became the third economy after Greece and Italy to experience a change of government in recent weeks after the conservative opposition swept to power in elections on Sunday.
Borrowing costs are beginning to surge for even highly rated countries such as Holland and France, as investors flock to established havens. The move is sending yields on benchmark US and German bonds down by several basis points.
The US Dollar Index was up 0.5 per cent. In contrast, the euro depreciated 0.6 per cent to $1.3446.
In a sign of how serious the euro-zone crisis has become, the European Commission is this week likely to issue a proposal for the joint issue of bonds among the currency's 17 governments. The plan to stem the troubles suggests the euro zone use its collective strength in bond markets to replace some or all of the fundraising being done by individual governments.
But the notion of joint debt issues is far-fetched as Germany, the euro zone's economic heavyweight, remains opposed to the idea, say analysts.
Although Europe has remained the main cause of global economic worry in recent months, the US will probably return this week to the forefront of investors' concerns.
The US bipartisan deficit-reduction supercommittee was expected to announce yesterday it had failed to meet its deadline to find $1.2tn in budget cuts over the next 10 years.
Anxieties are rising that a lack of agreement is likely to lead to similar political gridlock that caused global stocks to tank and drove the country to the brink of a historic debt default in August.