Key Points:

Battered by a fortnight of losses, world sharemarkets fell sharply yesterday.

The slump came amid signs that panic was taking hold among investors worrying about a US recession which could choke growth in the world economy.

American markets were closed for the Martin Luther King Day holiday, but investors took their cue from Europe where all the major markets had their biggest one-day fall since September 11, 2001.

Britain's FTSE 100 ended 5.5 per cent down, Germany's DAX fell 7 per cent and the French CAC 40 fell by almost the same margin.

"There is a wave of panic emerging as the fear unfolds," said Martin Slaney, head of derivatives trading at GFT Global Markets in London.

In New Zealand the NZX-50 index fell swiftly when the market opened yesterday.

It lost almost 4 per cent, but recovered to close down 39.7 points or 1.1 per cent at 3607.13.

Brokers said bargain hunters were seeking out stocks they believed had been oversold.

But the NZSX's record run of negative sessions extended to 14 days.

The local market outperformed most others in the Asia Pacific region.

Australia's ASX 200 was down 7 per cent and Hong Kong's Hang Seng index lost 8 per cent.

The Australian market's slip was the worst since 1997 and extended its decline from its November 1 high to more than 20 per cent.

"This has been a crash and it might take a year to get back to where it was last week," said fund manager Michael Birch, of Wallace Funds Management in Sydney.

"It might be the second half of the year before people have the confidence to weigh back in."

After Monday's rout in Europe and yesterday's losses elsewhere, all eyes were on the American market.

US stock index futures suggested a further sell off there when business resumed yesterday.

International Monetary Fund managing director Dominique Strauss-Kahn did little to ease market fears, describing the US situation as serious.

"All countries in the world are suffering from the slowdown in growth in the United States."

Investor George Soros, who has made billions by identifying and exploiting macro-economic trends, said the world was facing its worst financial crisis since World War II.

In New Zealand, broker James Smalley of Christchurch firm Hamilton, Hindin Greene attributed the local market's resilience to two factors - to its lack of large financial stocks that elsewhere have been hit hard by US subprime-related credit issues, and the effect sharemarket problems were having on currency markets.

"One of the silver linings to this black cloud is that the New Zealand dollar is taking an absolute pasting," he said.

"If you're an exporter you're thinking you could start making money again."

The Kiwi dollar closed at US74.58c yesterday after touching a four-month low of US74.01c during the session.

It has lost 6 per cent of its value against the American dollar in eight days.

* ADDITIONAL REPORTING BY AGENCIES