On Monday, the US government warned that job losses were continuing to mount, saying it expected the unemployment rate in the world's number one economy to top 10 per cent within the next two months.

US unemployment already stands at 9.4 per cent, the highest level in a quarter of a century.

That set alarm bells ringing on Wall Street which suffered its worst one-day loss in two months, with the Dow Jones Industrial Average ending the day down 2.4 per cent and the broader S&P 500 index sliding 3.1 per cent.

China outlook 'grim'

"Investors are facing the reality again"

Peter Lai,
DBS Vickers in Hong Kong

On Tuesday, the deputy head of China's central bank added to the cautionary tone, saying that while China's economy was heading in the right direction, the foundations of recovery are not yet solid.

"The overall situation is stabilising and moving in the right direction," Su Ning, vice-governor of the People's Bank of China, told reporters in Beijing, but he said that concerns remains about the "grim" international environment for Chinese exporters.

With companies and consumers still reluctant to spend, China and other export-dependent Asian economies are continuing to face uncertain times.

Recent months had seen hopes raised that the recession may be levelling out, leading to a surge on global markets since March with some like Hong Kong up by nearly 60 per cent.

'Correction beginning'

But the world economy is still struggling with the effects of last year's collapse in the US housing market and analysts say the recent cautionary tone triggered a sell-off as investors look to lock in profits.

"The markets have been overbought, and now the correction is beginning," Peter Lai, investment manager at DBS Vickers in Hong Kong, told the Associated Press.

"Investors are facing the reality again. People fear the liquidity and funds will start flowing out of the markets, so we're seeing profit taking."

Later on Tuesday investors will be closely watching the latest US housing data as well as the Federal Reserve's interest rate setting committee which begins its two-day meeting.