'Flirting with recession'
Al Jazeera's John Terrett, reporting from the New York Stock Exchange, said: "The US is formally flirting with recession - and now we have the figures to prove it.
"The US will formally be in recession if the next quarter's figures show the economy has shrunk."
Barack Obama, the Democratic presidential candidate, said in a statement the data was "a direct result of the Bush administration's trickle-down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years and
plans to continue for the next four".
A senior policy adviser for McCain said Obama would only accelerate the US economy's decline with "ideologically-driven plans to redistribute income" continuing a Republican campaign theme the Democrat's taxation plans were a form of socialism.
Although the figures indicate the nation is slipping into a recession, US share prices rose after the report's release, as market players had been expecting the statistics to be worse.
The Dow Jones average closed 2.1 percent higher at 9,181 points. While the Nasdaq composite index rose or 2.49 per cent, to finish at 1,698.52.
The movements also came a day after the Federal Reserve, the US central bank, as widely expected, cut its key interest rate by a half point for the second time this month to a historic low of one percent to ease the credit squeeze.
Analysts said the Fed's move also showed it was leaving the door open to further rate cuts in the face of a sharp slowdown in the world's biggest economy.
In Europe, the pan-European FTSEurofirst 300 index closed up 0.7 per cent after volatile trade, rising for a third straight day to close at 903.61 points.
London's FTSE 100 index ended up 1.2 per cent, Germany's DAX closed 1.3 per cent higher and France's CAC 40 finished having gained 0.2 per cent.
Tokyo's benchmark Nikkei 225 earlier ended up nearly 10 per cent, or 818 points, at 9029.76.
The Nikkei has risen 26 per cent in the past three sessions after hitting a 26-year low last week.
In Hong Kong, the Hang Seng index jumped nearly 13 per cent, while in Seoul, South Korea's Kospi index witnessed a record day, surging nearly 12 per cent.