The S&P 500 slipped 30.65 points, or 2.28 percent to end at 1,314.55.

The Nasdaq fell 66.11 points, or 2.33 percent to finish at 2,769.19.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, surged 18.45 percent, to end at 18.30.

The Dow and S&P have seen the biggest drops since August 11, 2010 and are now on pace for a fifth straight week of losses. The Nasdaq saw its worst first day of the month since October 2009. All 10 key S&P 500 sectors dropped, led by financials, materials and industrials. In addition to the increased risk of restructuring, the agency cited "highly uncertain" growth prospects and missed targets in budget reforms.

In Europe, stocks closed lower amid renewed worries over Greece's debt troubles. Moody's Investors Service downgraded Greece again and said it sees "at least even" chance of a default.

"US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn't revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing. And that's just in the last week and a bit," said Riddell.

Pointing to the dramatic turnaround in the Citigroup "Economic Surprise Index" for the United States, Riddell said the tumble in a matter of months to negative from positive is almost as bad as the situation before the collapse of Lehman Brothers in 2008. "The correlation between the economic surprise index and Treasury yields is very close, so the lesson is that whatever your long term macro views are regarding hyper inflation vs deflation or the risk of the US defaulting, the reality is that if you want to have a view about government bond prices, the best thing you can do is look at the economic data to see what's actually going on," said Riddell.

"And right now, the economic data is suggesting that however measly you may think a 3 percent yield is on a 10-year Treasury, the yield should probably be a fair bit lower given what's going on in the US economy," said Riddell. "You've also got to wonder at what point the markets for risky assets start noticing, too."

"QE3 anybody?" asks Riddell.

The scale of the buying of UK Government debt was revealed in figures published on Wednesday by the Bank of England, which show the increased dependency of the gilt market purchases by the country's major banks. Simon Ward, chief economist at Henderson Global Investors, said THE ACTIONS OF THE BANKS WAS IN EFFECT DELIVERING A SECOND ROUND OF QUANTITATIVE EASING FOR THE ECONOMY.

"The government has been able to continue to fund the large budget deficit at low interest rates in recent months because banks and building societies have stepped up gilt purchases. For the moment, banks are effectively delivering the QE2 stimulus sought by MPC [Monetary Policy Committee] arch-dove Adam Posen," said Mr Ward.

Mr Posen has made frequent calls for the UK to embark on a new round of stimulus for the economy and said last month that the injection of 50 billion pounds would help the recovery.

"Downgrades. QE3 (a third round of quantitative easing) is coming," said Maughn. "The bond markets are all smarter than us, and that's exactly what the bond markets are telling me."

"What's interesting in the bond markets over the last couple of sessions is, you've seen human traders trying to step in and call this turn in the market the same way that equities have done... and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up," added Maughn. Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

"One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter. That cash injection will have the normal inflationary knock-on impact, driving back up commodities, supporting industrial stocks, dragging the financials up with them... I think it's all about the monetary injection trade," Maughn told CNBC.

The mission was given an initial 90 days, which would have run out on 27 June. Aside from Nato members, the talks at alliance headquarters included ambassadors from the five non-Nato countries participating in the Libya campaign; Jordan, Qatar, Sweden, the United Arab Emirates and Morocco.

The decision was practical in part; to accommodate the military planners of the contributing forces. But correspondents say it also aims to send a message to Libyans who have for the past three months been trying to topple Colonel Muammar Gaddafi after more than four decades of autocratic rule. "Nato, our partners, the whole international community, stand with you," said Mr Fogh Rasmussen. "We stand united to make sure that you can shape your own future. And that day is getting closer."

Critics of the Nato mission say it has reached a stalemate. Some of those who went along with the original vote at the UN Security Council - notably Russia - are alarmed that a mission designed to protect civilians from forces loyal to Colonel Gaddafi has drifted towards deposing his regime altogether.

"There is definitely going to be another financial crisis around the corner because we haven't solved any of the things that caused the previous crisis," Mobius said at the Foreign Correspondents' Club of Japan in Tokyo today in response to a question about price swings. "Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes."

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to US home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman's downfall and the market bottom on March 9, 2009.

"With every crisis comes great opportunity," said Mobius. When markets are crashing, "that's when we're going to be able to invest and do a good job," he said. The freezing of global credit markets caused governments from Washington to Beijing to London to pump more than $3 trillion into the financial system to shore up the global economy. The MSCI AC World gauge surged 99 percent from its March 2009 low through May 27.

The index's reading of 125.41 for the quarter was the lowest since house prices began falling in the summer of 2006. The report "is marked by the confirmation of a double-dip in home prices across much of the nation," said David Blitzer, chairman of the committee that puts together the report. "Home prices continue on their downward spiral with no relief in sight." While the housing market has been a well-known Achilles heel for the recovery, yesterday also saw evidence that the country's manufacturing sector - a robust, albeit small, part of the economy - is slowing.

A reading from the Institute for Supply Management's index that measures the state of manufacturing around Chicago showed a decline to 56.6 last month (May) from 67.5 in April. There were further signs that high food and gas prices are denting the confidence of consumers, whose spending is central to the economy's fortunes. Consumer confidence reached a six-month low in May, according to an index from the Conference Board, as the reading dropped to 60.8 from 66 in April.

The latest slew of readings adds more pressure on the US jobs market to continue its recovery and shore up Americans' confidence. The monthly jobs report for May will be released on Friday. "Weakness in manufacturing also points to a risk of a weaker-than-expected payroll report on Friday and reinforces the general sense the economy is losing steam," said Chris Low, an economist at FTN Financial.

News of the three-year contract emerged as the service undergoes a round of cuts - including the loss of aircraft carrier HMS Ark Royal, Harrier jump-jets, and 5,000 jobs. The ship will patrol the waters around the Falkland Islands and South Atlantic and take on the Navy's Antarctic mission.

The ship has undergone a refit involving the repositioning of the flight deck from the bridge roof to the stern. There has also been the installation of a multi-beam echo sounder survey system, an overhaul of the main engines and gearboxes and the addition of naval insignia. An MoD spokeswoman said: "HMS Protector offers a highly capable and value-for-money solution to fulfil the important ice patrol ship capability while a decision is made on the future of HMS Endurance." The 4,985-ton ship will be crewed by 76 Royal Navy personnel.

"If inflation does not come down in the way that the Bank is suggesting - and I think there is a big risk that is the case - than that is going to have a big knock on effect on the credibility of the bank's commitment to its inflation target." Mr Sentance reached the end of a five-year tenure as a Bank of England policymaker on Tuesday.

Over that period, inflation has been above the Government's 2% target much of the time, with CPI currently standing at 4.5%. For the past 12 months, Mr Sentance has called for a rise in the historically low interest rate in an attempt to control inflation. Two other members of the nine-strong Monetary Policy Committee (MPC) have joined his stance, but so far they have been outvoted by those who want to keep the rate at 0.5%.

China's official purchasing managers' index touched a 9-month low and a private survey hit its lowest mark in 10 months, held back by power shortages and a clamp-down on credit. Business surveys for South Korea, India and Taiwan also showed the pace of manufacturing activity easing. US and European figures later on Wednesday are expected to show a slowdown for May as well.

Some slackening was expected as quake-damaged Japan struggled to churn out parts for the automotive and high-tech industries. Lacklustre growth and consumption in the United States and Europe has also restrained demand. But investors are nervously watching for any evidence that Asia's slowdown is worsening as central bankers tighten credit conditions to try to tame inflation. China's PMI readings were slightly below economists' forecasts, and new orders declined sharply, suggesting more weakness to come.

"The economy has hit a temporary pothole courtesy of the natural disasters this year," said Besa Deda of St George Bank. Australia has not only had to deal with the twin natural disasters. Other factors have also slowed down its economy. The country's growth has been powered by a boom in its resources sector.

As economies like China and India grew, the demand for Australia's resources witnessed a massive surge. However, analysts say the situation is changing."We have been in a honeymoon period for a long time," said Jonathan Barratt of Commodity Broking. "The time has come for realignment. As growth in China and India slows down, the pace of growth in Australia will also be affected," he added.

The House Appropriations Committee today will review the fiscal year 2012 appropriations bill for the Department of Agriculture that includes $71 billion for the agency's "Supplemental Nutrition Assistance Program." That's $2 billion less than what President Obama requested but a 9 percent increase from 2011, which, critics say, is too large given the sizeable budget deficit. More than 44.5 million Americans received SNAP benefits in March, an 11 percent increase from one year ago and nearly 61 percent higher than the same time four years ago.

Nearly 21 million households are reliant on food stamps. Opponents of the program argue that money from the food stamps budget - with what they call its increasingly lax requirements - needs to be shifted to other programs such as education and child nutrition. The program's supporters argue that at a time of economic decline, such welfare programs are even more important to try to keep Americans from spiraling into poverty. The cost of the food stamps program has increased rapidly since it was established by Congress in 1964. It cost taxpayers more than $68 billion last year, double the amount in 2007.

But many residents around the lake said that was a fitting label for the months-long drought that has drastically shrunk the lake, the adjacent Yangtze River, and many other lakes and tributaries along the mighty river's course through farming and industrial heartlands. "I've never, ever seen it this bad. Look at the rice. It's all going yellow and the stalks will die unless we get some rain soon," said Ouyang Jinghuang, a pepper-haired 66-year-old farmer tending rice paddies near Lake Honghu. "We're all digging wells and buying our drinking water. Usually, we have so much water here that we worry about floods, not droughts."

The dry spell is a jarring reminder of how China, the world's second-biggest economy, relies on increasingly strained water resources to feed its people and power rapidly increasing numbers of hydro stations. Those problems could deepen if rains fail to arrive soon. "There's still water, but it's not enough to share around," said Gao Desheng, a farmer in his sixties who was taking a rest after plowing a field using an ox, the centuries-old farming method still favored here.

"Before, the sky would always send more than enough water. But this year, the sky has just stopped sending. It's as if we offended it." Millions of farmers in Hubei, Hunan, Jiangxi and other provinces face similar threats of damaged or even lost rice crops. Almost 35 million people across five provinces on the middle and lower reaches of the Yangtze have been affected to different degrees by the drought, the Chinese Ministry of Civil Affairs said on Friday. That number includes 4.2 million who have difficulty getting drinkable water.

But the drought also threatens to cut into power production, since the Yangtze River and its tributaries feed the Three Gorges Dam, the world's biggest hydropower project, as well thousands of smaller hydro plants.

Underground Jerusalem is different: Here the noise recedes, the fierce Middle Eastern sun disappears, and light comes from fluorescent bulbs. There is a smell of earth and mildew, and the geography recalls a Jewish city that existed 2,000 years ago. Archaeological digs under the disputed Old City are a matter of immense sensitivity. For Israel, the tunnels are proof of the depth of Jewish roots here, and this has made the tunnels one of Jerusalem's main tourist draws: The number of visitors, mostly Jews and Christians, has risen dramatically in recent years to more than a million visitors in 2010.

But many Palestinians, who reject Israel's sovereignty in the city, see them as a threat to their own claims to Jerusalem. And some critics say they put an exaggerated focus on Jewish history. A new underground link is opening within two months, and when it does, there will be more than a mile of pathways beneath the city. Officials say at least one other major project is in the works. Soon, anyone so inclined will be able to spend much of their time in Jerusalem without seeing the sky.

South of the Old City, visitors to Jerusalem can enter a tunnel chipped from the bedrock by a Judean king 2,500 years ago and walk through knee-deep water under the Arab neighborhood of Silwan. Beginning this summer, a new passage will be open nearby: a sewer Jewish rebels are thought to have used to flee the Roman legions who destroyed the Jerusalem temple in 70 A.D. The sewer leads uphill, passing beneath the Old City walls before expelling visitors into sunlight next to the rectangular enclosure where the temple once stood, now home to the Al-Aqsa Mosque and the gold-capped Dome of the Rock.

From there, it's a short walk to a third passage, the Western Wall tunnel, which continues north from the Jewish holy site past stones cut by masons working for King Herod and an ancient water system. Visitors emerge near the entrance to an ancient quarry called Zedekiah's Cave that descends under the Muslim Quarter.

In part, the Pentagon intends its plan as a warning to potential adversaries of the consequences of attacking the US in this way. "If you shut down our power grid, maybe we will put a missile down one of your smokestacks," said a military official. Recent attacks on the Pentagon's own systems - as well as the sabotaging of Iran's nuclear program via the Stuxnet computer worm - have given new urgency to US efforts to develop a more formalized approach to cyber attacks.

A key moment occurred in 2008, when at least one US military computer system was penetrated. This weekend Lockheed Martin, a major military contractor, acknowledged that it had been the victim of an infiltration, while playing down its impact. The report will also spark a debate over a range of sensitive issues the Pentagon left unaddressed, including whether the US can ever be certain about an attack's origin, and how to define when computer sabotage is serious enough to constitute an act of war. These questions have already been a topic of dispute within the military.

One idea gaining momentum at the Pentagon is the notion of "equivalence." If a cyber attack produces the death, damage, destruction or high-level disruption that a traditional military attack would cause, then it would be a candidate for a "use of force" consideration, which could merit retaliation