Elsewhere in Asia, Hong Kong's Hang Seng index also fell by 3.7 per cent before rallying slightly as investors snapped up bargain-priced stocks.

 

The Australian stock exchange was also saw a roller coaster day, down by 2.4 per cent at one point, while the key indices in the Philippines and Singapore also took a beating.

 

Chinese stocks largely bucked the trend however, with the main Shanghai index recording only a slight drop of 0.31 per cent.

 

Reporting from Beijing, Al Jazeera's correspondent Melissa Chan said investors appeared to still have a lot of confidence in the Chinese economy, making it for now at least largely impervious to what is happening in the rest of the world.

 

Worsening outlook

 

The falls came as the US economic outlook worsened, raising concerns about a contraction in the US economy and driving investors to sell off stocks in Asia's big exporters.

 

Investors around the world are jittery about the full extent of the US sub-prime mortgage crisis in the US, sparking a credit crunch and billions of dollars of losses at major American investment banks Citigroup and Merrill Lynch.

 

Adding to jitters a US government report showed a sharp and unexpected decline in manufacturing activity, helping send the Dow Jones industrial average sliding 2.5 per cent Thursday to its lowest level since last March.

 

Japan's finance minister said on Friday that concerns were growing as share prices fell in Tokyo on the heels of the overnight fall on Wall Street.

 

Fukushiro Nukaga, however, said he saw no need yet to fret over domestic stock price falls and the strengthening of the yen.

 

Benjamin Pedley, a Singapore-based investment strategist, told Al Jazeera, he believes the US economy is already in recession.

 

'Clear signs'

 

Pedley said: "I think we already had some very clear signs of that from data out of Asia in the last couple of weeks, when we saw that the Singapore economy surprisingly contracted in the fourth quarter of 2007.

 

"And when you consider that Singapore is so reliant on exports to drive overall economic activity, that was a very clear sign the US economy was in trouble in the latter stages of 2007.

 

"We believe that the US will post two consecutive quarters of economic contraction, which is the technical definition of a recession. And that is undoubtedly going to continue to affect Asian economies. We expect growth to slow there too.

 

"I don't think anywhere in Asia you'll be absolutely safe. But I think markets like India - which is more domestic-market oriented - may be slightly more insulated than the export-reliant economies."