Stock markets in the US and Europe saw mixed fortunes as the scale of the impact of the US sub-prime crisis on the banking industry dominated trading.
After a volatile session, the Dow Jones closed down 55.2 points at 12,987.5, falling below the 13,000 mark for the first time since August.
But shares closed up in London and Paris on suggestions that banks will be able to weather the credit crisis.
Bank stocks have fallen in recent days on fears of further heavy losses.
US banks Merrill Lynch, Citigroup and Morgan Stanley have all revealed huge liabilities from mortgage-backed investments whose value has plummeted due to the US housing slump.
Further gloomy news came from E-Trade Financial Corp whose shares fell more than 50% after it said the value of its mortgage-backed securities had reduced sharply.
There is a fear that things are going to get worse rather than better
Peter Cardillo, Avalon Partners
The firm insisted it could absorb write-downs of up to $1bn and still continue trading but the news spooked a market wary of any further sign of weakness in the financial sector.
"The problem is just the mood of the market," said Peter Cardillo, chief market economist at Avalon Partners.
"There is a tense feeling that there will be still more problems with the sub prime situation and a fear that things are going to get worse rather than better."
In Europe, it was a slightly different story as bank shares rallied strongly.
There have been fears that some of Europe's leading banks would be similarly affected but analysts said that these fears may have been overstated.
In London, Royal Bank of Scotland shares rose 9% while Barclays gained 8% as the FTSE closed up 33 points at 6,337.9.
The benchmark Cac index also rose in Paris although Frankfurt's Dax lost ground.
"Since nothing has emerged so far in terms of write-down there's a sense among some investors that they've overdone the sell-off," said Commerzbank economist Peter Dixon of the recent weakness in bank stocks.
"My general view is that the worst case will not materialise with banks writing off more than their core capital."
Earlier, Tokyo's Nikkei ended 2.48% down at 15,197.09, and the broader Topix slid 2.54% to 1,456.40 - both 15-year lows while Hong Kong's Hang Seng Index fell 4.5%.
The financial fallout from the US sub-prime crisis in now being felt all over the world.
"I'm afraid factors from overseas, such as sub-prime problems, are coming over to Japan," said Chief Cabinet Secretary Nobutaka Machimura.
We'll closely monitor the situation," he added.
Japanese investors sold shares in firms heavily-reliant on exports to the US, especially car and electronic companies, as the yen hit its strongest level against the dollar since May 2006.
What started as problems in the US housing market, with default rates on mortgages rising in the wake of a series of interest rates rises, later spread to other markets.
As banks begin to reveal their exposure to the sub-prime sector - which specialises in lending to riskier borrowers - there are increasing fears that greater financial losses lie ahead.
Elsewhere, China's Shanghai Composite Index fell nearly 3% while in India, the benchmark index in Mumbai slid more than 3%.