The fear and uncertainty that has wiped trillions off the value of global stocks since last week may continue for at least two more days, a local fund manager says.
After closing down 2.78 per cent on Monday, the NZX-50 index shed another 2.75 per cent yesterday.
"We're expecting a few choppy days," said Shane Solly, an Auckland-based portfolio manager at Mint Asset Management.
The New Zealand dollar also fell prey to panic selling. It sank as far as US79.59c, down more than US3c from its high for the day of US82.82c, invoking memories of the kind of extreme market volatility seen when Greece's sovereign debt problems first surfaced in May 2010 and during the 2008 global financial crisis (GFC).
By 5pm, the kiwi had recovered somewhat to US81.86c.
"The market is pricing in GFC II as we speak, whether or not it will actually happen," Westpac senior market strategist Imre Speizer said.
"It is being built into prices and there is widespread panic selling throughout the Asian equity markets, the Aussie and Kiwi interest rate and the currency markets," he said.
Eyes were turning to the US Federal Reserve, and the results of this morning's open market committee meeting as to whether the central bank might consider a fresh economic stimulus package, or so called "quantitative easing" to try to kick-start the US economy.
The Federal Reserve said that it will likely keep interest rates at record lows for the next two years after acknowledging that the US economy is weaker than it had thought and faces increasing risks.
That saw US stocks turn negative after what had already been extremely volatile trading.
At close of trade on Wall Street, the Dow Jones was up 429 points after a late rally - a 2.65pc gain.
The S&P 500 index closed up 4.7 percent and the Nasdaq rose 5.3 per cent.
The New Zealand dollar is now a far cry from last week's record post float high of US88.42c. The currency's decline was initially seen as a technical adjustment.
"Now it's turned into a rout, along with the rest," Imre Speizer said.
But he expected support for the currency to emerge at around US78c. Against the aussie, the NZ dollar lifted to A80.92c at 5pm from A80.18c on Tuesday.
The NZX-50's plunge followed a tumultuous night on markets in Europe and the United States. In the US the Dow Jones industrial average, reeling from a downgrade of American debt, plunged 5.5 per cent while the S&P 500 tumbled 6.66 per cent.
It was the worst day for US stocks since December 2008, when the global financial crisis was in full swing.
"We need some policy action from the US Federal Reserve to provide a lifeline to improve investor confidence," said Solly.
Across Asia shares fell heavily but recovered late in the day. Australia's S&P/ASX-200 finished up 1.22 per cent after falling as much as 5 per cent during earlier trading.
Japan's Nikkei 225 index plunged 4 per cent but closed down just 1.68 per cent, while Hong Kong's Hang Seng index plummeted 8 per cent before an up-and-down ride to end 5.66 per cent down. South Korea's Kospi index fell 3.68 per cent.
Trading on the Kospi was briefly suspended after the index dipped 8.6 per cent at one point.
In a live chat on nzherald.co.nz, NZX chief executive Mark Weldon said the sell-off in global markets was a "crisis in faith" in large Western governments. "I would expect the largest economies in the world to get together and act in a co-ordinated way on these major issues soon, and you would think any politician seen to push the US to another downgrade would lose at the polls," he said.
Hamilton Hindin Greene client adviser James Smalley said it was impossible to say when the market would bottom out from its fall.
"You find the market bottom when sentiment is so resoundingly negative that basically everyone who wants to sell has sold and there's no more sellers," he said.
Craigs Investment Partners head of research Mark Lister said bargain hunters would be starting to buy up shares in NZX-listed companies.
"Quality companies that actually have quite good prospects are actually starting to look quite attractive."
BNZ currency strategist Mike Burrowes said volatility in the foreign exchange market was also reflecting the fear factor. "That's what is driving global equity markets at the moment - fear that we might potentially be entering another global recession.
"It is not to say that that is unjustified, but for now there is an element of the market feeding on itself.
"I think there is a lot of panic out there with investors, but it seems that for now we are a long way from a global financial crisis," he said, adding the kiwi still remained high by historical standards.