Recession fears weigh down markets

(CNN) -- World markets continued their downward trend Wednesday, as recession fears remained to the fore.

In an effort to bolster economic confidence U.S. Treasury Secretary Henry Paulson said he had seen signs of improvement in the economic situation.

However Wall Street markets dipped further, weighed down by losses in Europe and Asia.

The benchmark Dow Jones and Nasdaq indexes were down nearly 4 percent in late trading.

Paulson said "at home and around the world" there were already signs of improvement.

"Our system is stronger and more stable than just a few weeks ago," Paulson said as he updated reporters on the progress of the U.S. government's financial rescue package.

But Paulson warned that the economy remained "fragile" and said further market turmoil could be expected as a consequence of the collapse of the U.S. housing market.

Broadening the reach of the Treasury's $700 billion bailout plan, Paulson said non-bank financial institutions that provide consumer credit, such as credit cards and auto loans, would also be eligible for government financing and warned that banks and non-banks could require further capital.

"Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions," Paulson said.

Major indexes across Europe staged modest rallies to shake off early declines but they had all slipped solidly back into negative territory by the close.

London's FTSE was down 1.52 percent at 4,182 points, while Paris' CAC fell 3.07 percent to 3,234 and Frankfurt's DAX lost 2.96 percent to finish at 4,621. Click here for a summary of the global markets »

Investors were faced with further economic uncertainty from the UK Wednesday as the Bank of England warned inflation could fall below its 2 percent target next year, prompting speculation that the central bank could slash interest rates further in an effort to ward off inflation.

The Bank of England last week chopped rates by 1.5 percent to 3 percent, their lowest since the 1950s.

The UK's Office for National Statistics also announced a sharp rise in unemployment in the last three months to 5.8 percent -- the highest figure in a decade, The Associated Press reported.

In Asia, Japan's Nikkei index finished down 1.3 percent, while the KOSPI in Seoul was off less than half a percent.

Australia's All Ordinaries index slipped a full percent. In Hong Kong, the Hang Seng shed about six-tenths of a percent.

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