Stocks on Wall Street tumbled the most in a month after Standard & Poor's cut its outlook on the US government, warning that its fiscal profile may become "meaningfully weaker" if the budget deficit isn’t reduced.
The ratings firm cut its outlook on US government debt to "negative" from "stable," to account for budget deficits and rising government indebtedness.
At the close (8am NZT), the Dow Jones Industrial Average was down 140.24 points, or 1.1%, to 12,201.59. Earlier, it was down as much as 246 points, or nearly 2%, at 12,193.89.
The S&P 500 index was down 1.1% to 1305.13, with industrials and materials stocks taking the hardest hit. The Nasdaq Composite was also down 1.1% to 2735.38.
The unexpected downgrade also hit the bond market, sending long-dated Treasurys into negative territory.
The drop in the benchmark 10-year note, which had been enjoying gains for much of the global day, lifted its yield to 3.43%, while the decline in the 30-year note pushed its yield up to 4.51%.
The US dollar fell swiftly against both the euro and yen, while gold futures set a fresh record as it neared $US1500 an ounce, while crude-oil futures slipped below $US107 an barrel.
Other markets: Europe plunges, Asia mixed
European stocks plunged after the US downgrade, raising further worries in markets already spooked by Eurozone debt fears.
Banks and insurers led the declines. A relatively weak Spanish Treasury-bill sale also weighed on sentiment.
The Stoxx Europe 600 index closed down 1.7% to 273.05. The UK's FTSE 100 dropped 2.1% to 5870.08, Germany's DAX slid 2.1% to 7026.85 and France's CAC-40 declined 2.3% to 3881.24.
Chinese stocks posted modest gains as investors shrugged off a weekend increase in banks' reserve requirement ratio. The Shanghai Composite Index finished 0.2% higher at 3057.33.
Japanese shares were pressured by a strengthened yen and caution ahead of corporate results. The Nikkei Stock Average fell 0.4% to 9556.65.
Hong Kong's Hang Seng Index fell 0.7% to 23,830.31, Korea's Kospi gave up 0.1% to 2137.72 and Taiwan's Taiex ended little changed at 8714.48.
Australia's S&P/ASX 200 climbed 0.2% to 4861.9 and India's Sensex fell 1.5% to 19,091.17.
Commodities: Oil tumbles, gold rises
Crude oil futures tumbled amid a broad sell-off sparked by the US ratings cut.
Light, sweet crude oil for May delivery traded $US2.67, or 2.4%, lower at $US106.99 a barrel in New York. Brent crude oil for June delivery on the ICE futures exchange fell $US2.02 to $US121.43 a barrel.
Gold futures climbed closer to the $US1500 level. The most actively traded contract, for June delivery, was up 0.3%, or $3.80 at $US1489.80 an ounce.
Currencies: Yen rises as US dollar drops
The Japanese yen traded sharply higher across the board to within striking distance of levels that immediately followed the G-7 intervention on March 18.
With US markets under pressure from the S&P downgrade, traders preferred the yen to the dollar.
The dollar fell 0.9% to as low as ¥82.19 in New York trading, marking a total decline of 1.3% from the highest point for the day – a big move for a major currency. The dollar traded at ¥82.41 from ¥83.08.
Meanwhile, the euro slumped to a low of ¥116.48 and was at $1.4214 from $1.4427 late on Friday.
The dollar bought 0.8968 Swiss franc from 0.8924.