Skittish investors snapped up gold and other safe-haven assets amid fears of a global economic slowdown, coupled with concerns about a potential credit default as lower commodity prices make payments by creditors in emerging markets difficult.
Major stock indexes in Europe and on Wall Street closed down more than 2 percent, while global crude oil benchmark Brent slumped more than 6 percent to settle below $29 a barrel, capping a 13 percent decline for the week.
"We're seeing the final capitulation," said Tina Byles Williams, chief investment officer at FIS Group in Philadelphia, which oversees about $4.4 billion in assets.
Williams said crude could hit $20 a barrel, a price analysts at Goldman Sachs have said may be needed to accelerate a slowdown in drilling and return global oil inventories to a supply-demand balance that would allow prices to rise.
The risk is that a creditor faced with declining revenues and higher payment costs because of a stronger dollar on its dollar-denominated debt sparks a default, Williams said.
"If that dollar-denominated debt went to finance commodity projects, then that's obviously quite a toxic brew," she said.
Yields on the benchmark 10-year U.S. Treasury note briefly fell below 2 percent for the first time since October as retreating oil and stock prices underpinned demand for assets perceived as safer. Bond yields and prices move inversely.
U.S. gold futures for February delivery settled up 1.6 percent at $1,090.70 an ounce.
The December futures contract on the federal funds rate surged to its highest since October, implying the Federal Reserve will raise benchmark U.S. interest rates only one more time this year.
The Fed raised rates for the first time in nearly a decade in December and signalled they expected four rate hikes in 2016.
In Europe, yields on euro zone debt fell as slumping oil prices eroded inflation expectations and raised the prospect that the European Central Bank will again ease monetary policy.
Minutes from the ECB's December meeting released on Thursday showed the bank sees scope for further cuts to its deposit rate as inflation risks missing already lowered forecasts.
German 10-year yields fell 4 basis points to 0.48 percent, back to levels seen before the ECB meeting on Dec. 3 when it cut rates and extended its bond-buying scheme.
The yield on the benchmark U.S. 10-year Treasury note fell to 2.0347 percent.
The Australian, New Zealand and Canadian dollars all sank against the U.S. dollar on the back of another slide in Chinese stock markets and the slide in oil. But the dollar fell against both the euro and yen.
World stock markets posted their third week of losses. European shares fell to their lowest since December 2014, hit by losses in commodity-related stocks after BHP Billiton announced a $7.2 billion write-down on its U.S. shale assets.
BHP shed 6.4 percent, one of the biggest decliners on the pan-European FTSEurofirst 300 index, which closed down 2.8 percent. MSCI's all-country world stock index fell 1.8 percent to levels last seen in July 2013.
BROAD SELLOFF
On Wall Street, the selloff was broad, with all 10 major S&P 500 sectors in the red and all 30 components of the Dow industrials lower. The beaten-down energy sector fell 2.9 percent, the second-biggest declining sector on the S&P 500.
More than one-fifth of S&P 500 stocks touched 52-week lows as the benchmark index slid to lows last seen in October 2014.
"Investors are scared to death," said Phil Orlando, chief equity strategist at Federated Investors in New York.
Topping investor concerns is a possible hard landing in China, the world's second-largest economy, that drags the rest of the world into recession, Orlando said.
Other concerns include the dollar's strength, the pace of rate increases planned this year by the Fed and a manufacturing recession, besides plunging oil prices, he said.
"It's not giving anyone any confidence because to me at least it resembles a bad reality show on television," he said.
The Dow Jones industrial average fell 390.97 points, or 2.39 percent, to 15,988.08. The S&P 500 slid 41.55 points, or 2.16 percent, to 1,880.33 and the Nasdaq Composite lost 126.59 points, or 2.74 percent, to 4,488.42.
Crude tumbled on a further decline in the Chinese stock market and as the prospect of an imminent rise in Iran's crude exports deepened fears of a prolonged supply glut.
Both of China's major stock indexes shed more than 3 percent, raising questions about Beijing's ability to halt a sell-off that has now reached 18 percent since the beginning of the year.
U.S. crude futures settled down 5.7 percent at $29.42 a barrel after sliding to a low of $29.13. The March Brent contract settled 6.3 percent lower at $28.94.
(Additional reporting by Dion Rabouin in New York; Editing by Chizu Nomiyama and James Dalgleish)
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