Stock markets in Europe and on Wall Street slumped as the crisis in Japan deepened as the situation at a heavily damaged nuclear power plant deteriorated.

Japan's benchmark Nikkei 225 Stock Average plunged 11 per cent on rising concern that the nuclear reactors damaged by the country's worst earthquake on record was headed for a meltdown.

Meanwhile, Bahrain declared a three-month state of emergency as the country enlisted help of other Gulf states to quash a month of anti-government protests.

In afternoon trading, the Dow Jones Industrial Average dropped 1.61 per cent, the Standard & Poor's 500 Index shed 1.57 per cent and the Nasdaq Composite Index lost 1.65 per cent.

"There's a lot more downside before I think we can expect a bottom, probably another 20 per cent downside," Tim Hartzell, who oversees US$300 million as chief investment officer for the Houston-based Sequent Asset Management, told Reuters.

"That's when we'll start to look to buy," said Hartzell, whose firm invests in Japanese stocks through exchange-traded funds, including the iShares MSCI Japan Index.

The Chicago Board Options Exchange volatility index, or VIX, jumped another 14 per cent.

In Europe, the Stoxx 600 dropped 2.1 per cent to 266.84, falling below its 200-day moving average for the first time since August.

Some investors remained upbeat, including BlackRock Multi-Asset Client Solutions Group (BMACS). The equities sell-off around the world in the past two days, particularly in Japan, did not necessarily signal the start of a stock market slump because any losses would be recouped relatively quickly, the New York-based global funds manager said today.

Friday's earthquake and tsunami was likely to cause a recession because of a drop in industrial output, although the impact of the disaster on the long-term growth of the Japanese economy was likely to be minimal, BMACS said.

BMACS said it expected the Japanese economy would rebound later in the year. "As such, we believe any short-term losses are likely to be made good over a reasonably short period," the funds manager said.

US Treasuries rose as investors fled to the relative safety of fixed-income securities. Yields on 10-year notes dropped seven basis points to 3.29 per cent at 12.50pm in New York, according to BGCantor Market Data.

The US dollar was 0.9 per cent weaker at 80.91 yen on electronic trading platform EBS, just shy of its record low of 79.75 reached in 1995. The greenback also tumbled to a record low against the Swiss franc of 0.9164 francs on EBS.

The euro was 0.2 per cent lower at US$1.3963.

"With the threat of a major nuclear disaster unfolding, the Nikkei suffered its third steepest drop in history," Camilla Sutton, senior strategist at Scotia Capital in Toronto, told Reuters.

"Foreign exchange markets are shedding risk, with the [ US] dollar, Swiss franc and yen all gaining ground."

Oil fell on concern that demand from Japan, the world's No.3 user, was likely to weaken in the short term.

Brent crude futures for April delivery slid US$2.96 to US$110.71 a barrel at 12.33pm EDT, while US crude futures for April delivery fell US$2.17 to US$99.02 a barrel.

"It looks like the Japanese economy may be affected for a longer period than was thought last week," Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut, told Reuters.

Copper sank, with three-month copper on the London Metal Exchange weakening to US$9,075 at 1529 GMT, down from US$9,195 a tonne at the close on Monday. It earlier dropped to US$8,950, the lowest level in three months.

"The latest news about radiation leaks in Japan is very worrying and markets hate worries. They hate geopolitical worries, earthquakes, tsunami and now this is yet another level of uncertainty," Credit Agricole analyst Robin Bhar told Reuters.

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