NEW YORK Shares on world markets slumped and the euro slid further on Wednesday as investors worried that the fiscal challenges facing U.S. President Barack a day after his re-election could lead to a new recession.
Fresh concerns about Europe's debt crisis added to the jitters among investors, who scrambled for safer assets. Benchmark U.S. Treasury yields were set for their biggest one-day fall since May.
Markets doubted that Obama can reach a timely deal with Republican lawmakers in the lame-duck session of a divided Congress to avert the "fiscal cliff" - some $600 billion in automatic tax hikes and spending cuts set to kick in on January 1.
"The minute such a deal is cut, we'll boom. If one is not cut - and soon - we may well double-dip into recession," said Robert L. Reynolds, president and chief executive of Putnam Investments in Boston.
"This upcoming lame-duck session may just be the most consequential in our lifetimes. The stakes are high and the time is short," he said in a statement.
Rhetoric from Obama and some top lawmakers on Wednesday suggested a possibility of reaching a compromise to avoid to a dire path for the economy and further erosion of the country's creditworthiness, but the contentious history between the two main political parties offered little confidence to investors.
Traders were also anxious about a vote in Greece's parliament later on Wednesday on an austerity package needed to secure a fresh injection of international aid and avert bankruptcy, which would rock the euro zone and world markets.
European Central Bank President Mario Draghi said the ECB expects the euro zone economy to remain weak "in the near term" and that the problems were spreading to Germany.
"If the Greek vote doesn't go through, there is a lot of downside risk to the euro as talk of a Greece exit will re-emerge," said Jane Foley, senior currency strategist at Rabobank.
Back on Wall Street, the market drop hark back to the one on the day after Obama won his first White House term in 2008.
The Standard & Poor's 500 index .SPX was set for its worst one-day loss since June. It ended down 33.86 points, or 2.37 percent, at 1,394.53.
Energy, healthcare, defense and the banking sectors ranked among the hardest hit after Obama defeated Republican Mitt Romney, whose policy positions favored those industries.
Despite Wednesday's ominous market reaction to a second Obama presidential term, the S&P had rallied 67 percent from the depth of global credit crisis under hisfirst term - one of Wall Street's best runs ever under a single president.
The FTSE Eurofirst 300 index .FTEU3 of top European shares closed down 1.4 percent, its biggest drop in two weeks, at 1,099.35. .EU
Bucking the market were French banking stocks. They were helped by BNP Paribas' (BNPP.PA) forecast-beating quarterly earnings, which sent its shares 1.0 percent higher to 39.54 euros.
European and Asian stock markets rose initially on relief buying when U.S. election results for the White House and Congress were clear and reinforced expectations the Federal Reserve's ultra-loose monetary policy will continue.
The MSCI world equity index .MIWD00000PUS was briefly 0.4 percent higher before falling 1.46 percent to 326.86.
As worries over the U.S. fiscal cliff and Greece's austerity votes moved to the forefront, investors flocked to the safety of low-risk assets, including the greenback and U.S. and German government bonds.
The U.S. dollar recovered from early losses, resuming its rally during this week's tense run-up to the U.S. election. The dollar index that measures the greenback against a basket of major currencies was up 0.2 percent .DXY, touching a two-month high earlier at 80.795. <FRX/>
The euro on the other hand fell 0.4 percent to $1.2762, retreating from a session high of $1.2876.
Gold turned lower after hitting a two-week high. It was last 0.3 percent lower at $1,720.40 an ounce. <GOL/>
In the bond market, the yield on 10-year Treasury notes ended 11 basis points lower at 1.6246 percent for its biggest single-day drop since May 30, according to Reuters data.
German Bund futures climbed 66 basis points, or 0.5 percent, at 142.75.
Worries about weaker energy demand caused a sell-off in the oil market after it rallied on Tuesday. Brent crude oil fell $4.25 to settle at $106.82 a barrel and U.S. oil futures settled down $4.27 at $84.44. <O/R>
(Additional reporting by Caroline Valetkevitch, Chuck Mikolajczak, Herbert Lash in New York; Marc Jones, Richard Hubbard, in London; Editing by Dan Grebler)
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