US stocks staged a late rally on Thursday while equity markets elsewhere continued to beat a retreat and commodity prices weakened further amid continuing volatility.

The US trading session was characterised by sharp swings in direction as sentiment remained finely balanced.

Wall Street's fluctuations came after Wednesday's 9 per cent drop for the S&P 500, the worst one-day decline since the 1987 crash. The US benchmark fluctuated through the course of the day before ending up 4.3 per cent at 946.43.

Selling by hedge funds, which are liquidating positions to meet investor redemptions or moving to cash because of extreme volatility, has fuelled the recent falls in stock markets, analysts said. Late on Thursday some analysts said that process was slowing.

Volatility, as measured by the Chicago Board Options Exchange Vix index, known as Wall Street's "fear gauge", hit a record 81.17.

Fears that the US economy had sunk into recession were amplified by data showing that industrial production fell 2.8 per cent in September, the largest drop in 34 years, while the October Philadelphia Fed survey declined to an 18-year low.

Worries about corporate defaults helped drive credit spreads sharply wider, with the iTraxx Crossover index of mostly junk-rated credits hitting a record wide of 749 basis points.

Recession worries also weighed on commodities. US oil prices sank below $70 level for the first time since August 2007, touching a low of $68.57 a barrel, after government data showed consumption down almost 9 per cent year-on-year.

US government bond markets were little changed with two-year Treasury yields up 5bp at 1.6 per cent. The benchmark 10-year yield was up 1 basis point at 3.96 per cent after benign US inflation data for September suggested little barrier to cuts in US interest rates.

European equity markets moved lower in spite of policymakers announcing further measures to support markets. In London, the FTSE 100 fell 5.4 per cent, taking its decline over the past two days to 12.1 per cent. In Europe, the FTSE Eurofirst 300 ended 5 per cent lower - down 11.1 per cent over the past two days.

"The market is starting to make a transition from pure financial concerns to fears over the impact of a sharp economic slowdown, with cyclical parts of equity markets, commodities and commodity currencies under substantial pressure," said Themos Fiotakis, of Goldman Sachs.

Switzerland announced its own banking bail-out by establishing a $60bn fund or "bad bank" to buy illiquid assets and providing a capital injection for UBS. The SMI index fell 3.3 per cent.

In Asia, Wednesday's sell-off on Wall Street sparked a region-wide decline.

Japanese equities had their worst one-day decline since the 1987 stock market crash, with the Nikkei 225 down 11.4 per cent.

Japan's prime minister said stock markets were selling off because investors thought the steps by the US authorities were insufficient.

The Shanghai composite closed 4.3 per cent lower, down 69 per cent from its peak exactly one year ago.

In Hong Kong, the Hang Seng fell 5.5 per cent and. in Korea, the Kospi dropped 9.4 per cent.

Nicholas Kwan, regional head of research at Standard Chartered, said the choking of some Asian money markets, prompted by escalated counterparty risk and liquidity shortages, was worrying. However, Mr Kwan also noted that money market rates were far below those suffered in the 1997-99 Asian financial crisis.

Meanwhile, stress in US and European money markets continued to show signs of easing. With the exception of overnight euro, interbank rates across all maturities for the dollar, euro and sterling fell for a fourth day in succession. Traders said the European Central Bank's move on Wednesday allowing banks to swap a larger range of assets for central bank funds was a clear signal that liquidity would be guaranteed at any price.

Although dollar and euro money market spreads have eased, funding conditions for eastern European institutions are difficult.

The ECB announced it would provide up to €5bn of liquidity to the Hungarian central bank, helping to stabilise the forint, although Hungary's stock market dropped 8.6 per cent.