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World Markets Plunge on News of Auto Bailout Collapse

World stock markets plunged Friday after a proposed U.S. government rescue of Detroit's ailing automakers collapsed in the Senate, intensifying fears about a protracted global slump.

European markets followed Asia lower, and U.S. stock index futures pointed to a sell-off Friday on Wall Street. The dollar sank to a 13-year low against the yen, dropping as low as 88.16 yen, and oil fell below $46 a barrel.

Investors were rattled after a $14 billion bailout for Detroit's struggling Big Three automakers failed to get approval in the U.S. Senate. The collapse came after bipartisan talks on the auto rescue broke down over Republican demands that the United Auto Workers union agree to steep wage cuts by 2009 to bring their pay into line with U.S. plants of Japanese carmakers.

The bankruptcy of any of the big American automakers would deal another blow to the world's largest economy, already in recession, and ripple through export-dependent Asia, as well as global financial markets.

"The automobile sector is a fundamental industry for both the U.S. and Japan, and a failure would be a major blow to Japan as well," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Tokyo. "The bailout failure is just the beginning."

Japan's Nikkei 225 stock average tumbled 484.68 points, or 5.6 percent, to 8,235.87, and Hong Kong's Hang Seng index slid 5.5 percent to 14,758.39.

In Europe, Britain's FTSE 100 was down 2.7 percent at 4,271.85, Germany's DAX was down 3.6 percent and France's CAC 40 slid 4 percent.

Wall Street was poised to fall as well, with Dow Jones industrial index futures down 224 points, or 2.6 percent, at 8,373 and S&P 500 futures down 31.30 points, or 3.6 percent, to 843.20.

Hopes for the U.S. auto industry now appear to rest with President George W. Bush agreeing to tap a $700 billion Wall Street bailout fund to aid the carmakers. General Motors Corp. and Chrysler LLC have said they could be weeks from collapse. Ford Motor Co. says it does not need federal help now, but its survival is far from certain.

"If a company such as General Motors filed for Chapter 11 bankruptcy protection it could strike the Dow below 8,000 again," said Jackson Wong, investment manager at Tanrich Securities in Hong Kong.

News about the rejected auto bailout sent the dollar as low as 88.16 yen — its lowest level since Aug. 2, 1995 — before it recovered to above 90 yen. That heaps more bad news on major exporters like Toyota and Sony — already reeling from waning global consumer demand — whose overseas income is eroded by an appreciating yen.

Toyota Motor Co. dived 10.1 percent, Nissan Motor Co. lost 11.5 percent and Sony Corp. fell 6 percent. South Korea's Hyundai Motor Co. shed 9.3 percent and Kia Motors Corp. was off 9.1 percent.

Mainland China's stock market fell as investors were discouraged by the lack of any major new initiatives to spur the economy following a top-level economic conference earlier in the week. The benchmark Shanghai Composite Index dropped 3.8 percent to 1,954.21.

"It's hard to truly convince investors that the government can move effectively to steer the economy from here. That's the source of the pessimism," said Cheng Weiqing, an analyst at Citic Securities in Beijing.

Figures this week show that China's economy is feeling the pinch of the global slowdown. For the first time in seven years, exports fell in November.

Investors also grappled with grim U.S. economic and corporate news. New unemployment benefit applications in the week ending Dec. 6 rose to a seasonally adjusted 573,000 from an upwardly revised figure of 515,000 in the previous week. And Bank of America Corp. announced it expects to cut 30,000 to 35,000 jobs over the next three years.

The past week of gains in world markets was "more predicated on hope than reality," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore.

Investors were now facing a reality check after earlier this week shrugging off dire economic data from the U.S. and China including the loss of more than half a million American jobs in November, he said.

Markets had rallied after President-elect Barack Obama last weekend flagged a massive stimulus package for the U.S. economy once he takes office in late January, pledging the largest public works program since the creation of the U.S. interstate highway network a half-century ago.

"This has been a typical bear market rally. It's been based on very high expectations of Obama's fiscal stimulus plan," Mahendran said. "It's been based on expectations and nothing else."