LONDON - World stock markets tumbled Tuesday, dragged down by heavy losses the previous day on Wall Street after the United States confirmed it was in recession and a raft of grim data suggested worse lay around the corner.

A steep interest rate cut by Australia's central bank and fresh steps by Japan to tackle the credit crunch failed to soothe investor fears.

Stocks slumped in Asia, with Tokyo closing down 6.35 percent, Hong Kong sliding 5.0 percent, Seoul shedding 3.3 percent and Sydney sliding 4.2.

In early European trade, London was down 1.43 percent, Frankfurt lost 1.60 percent and Paris fell 1.41.

"We believe that last week's stock rally went too far and markets were ripe for a correction," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.

"The reason for the rebound in risk aversion was dismal data from across the globe, mostly regarding the manufacturing sector in November," he said.

US manufacturing slumped to a 26-year low in November, highlighting the abrupt downturn in the world's biggest economy, a survey showed.

The National Bureau of Economic Research (NBER) said the US economy had been in recession since December 2007.

Investors were spooked by a report in the Wall Street Journal that investment bank Goldman Sachs -- which has fared better than many rivals during the financial crisis -- is likely to post a quarterly loss of as much as two billion dollars.

Australia's central bank slashed interest rates by 100 basis points -- a larger cut than expected that dropped the official cash rate to 4.25 percent, its lowest level in more than six years.

But the rate cut "didn't do anything to boost the market," said CommSec market analyst Juliette Saly.

Japan's central bank meanwhile outlined new measures to make it easier for commercial banks to borrow money using corporate debt as collateral, aiming to unclog credit markets that are vital to the economy.

In the 15-nation eurozone, an index of manufacturing activity hit a record low of 35.6 points last month, data revealed Monday.

"I have never before seen a financial system that has been in pain for so long," said Chuo Mitsui Trust Bank strategist Yosuke Hosokawa.

"Markets are wondering whether the negative situation will deepen further. My impression is that the recession will last for quite a while," he added.

Investors were also keenly watching developments over the fate of the Big Three US carmakers, whose executives return to Washington this week to plead again with lawmakers for financial lifelines to help them survive.

Finance ministers from the 15 countries sharing the euro failed to commit to a proposed 200-billion-euro (260 billion dollars) economic stimulus target while agreeing they need a joint anti-recession package.

Traders were anticipating big interest rate cuts by the European Central Bank and the Bank of England on Thursday to fight recession in the region.