BERLIN -- A dark cloud has settled over the world's financial markets, as growing numbers of people are concluding the debt crisis in Europe could hammer global growth -- and even bring back recession barely a year after a patchy recovery took hold.
Government officials, whose job it is to boost confidence, downplay that risk, but many economists are warning that a much-feared "double-dip" recession could be starting in Europe.
It would be the next ugly chapter in the global financial and economic turmoil that began three years ago. And now as then, what is striking is the inter-connectedness of everything: How near-default in Greece and weeks of dithering in Germany have affected commodities such as oil and gold and, with demand and confidence waning, have bludgeoned stock markets around the world in a way that rattles ordinary people saving for retirement from Korea to California.
In 2007, the bad debt connected to repackaged subprime mortgages started undermining banks and hedge funds, and by early 2008, confidence in the system was slipping fast.
This time, it is the exposure of banks everywhere to sovereign debt -- the IOUs of governments -- whose value has been falling for months.
The sheer size of the European economy is a factor, said Mauro F. Guillen, director of the Lauder Institute at The Wharton School in Pennsylvania.
"If European demand goes down, global growth will slow down," he said. "A European economy that lags is not necessarily enough to put the world economy back into recession. But a European economy that cannot stabilize its currency and capital markets certainly will push the global economy back into the red."
Nicholas Colas, ConvergEx Group chief market strategist, said: "A double dip is a possibility."
It is a daunting prospect because having already deployed their best countermeasures -- stimulus spending and central bank interest rate cuts -- governments everywhere may be out of ammunition.
Stephen Lewis, a London-based economist with Monument Securities, spoke for many of the pessimists Friday after a week of market turmoil in Europe when he saw "no guarantee that the upswing in the global economy from 2009's low point will be sustained."
At the heart of the crisis are fears that indebted eurozone governments will not be able to pay what they owe. Those fears have sent the prices of government bonds plummeting. Europe also faces low growth prospects because governments must cut back on spending to pay down heavy debt loads.
If banks in Europe and beyond suffer losses on marked-down government bonds, this would then make them afraid to lend the money that businesses need to operate and expand, choking off growth -- a replay in a sense of the freezing of credit markets after the September 2008 collapse of the U.S. investment bank Lehman Brothers, which led to a worldwide recession. The global economy shrank by 0.6 percent in 2009, its first dip since World War II.
As fear spreads, stocks and the price of oil, both signs of expectations for future economic growth, have been drawn into the downdraft. And gold, traditionally a safe haven, has hit ominous all-time highs.
Most of the world's leading stock markets are below where they started the year as investors revise down their growth expectations for the global economy.
Reflecting the optimism that held sway until recently, the IMF in April slightly raised its 2010 global growth forecast to 4.2 percent although eurozone growth was forecast at only 1 percent. Now even that looks optimistic.
Daniel Tarullo, a governor with the U.S. Federal Reserve, told a House subcommittee Thursday that Europe's crisis was a "potentially serious setback." Tarullo said that the worst-case financial turmoil, possible but still unlikely, "could lead to a replay of the freezing up of financial markets that we witnessed in 2008."
The latest crisis erupted in October, when the new government in Greece admitted its predecessors had lied about the size of their budget deficit. Instead of 3.7 percent of gross domestic product, it was a destabilizing 12.7 percent, since revised up to 13.6 percent.
Fears spread for a similar scenario in other countries, and that shattered confidence in the euro, which has in recent months lost about 20 percent of its value.
A bailout seemed necessary, but eurozone leaders struggled to agree, with opposition especially strong in Germany.
As Europe dithered, Greece faced skyrocketing borrowing rates driven by fear of default and ultimately was shut out of bond markets. Eurozone governments, with an assist from the International Monetary Fund, eventually produced a bailout for Greece, followed by a backstop for other shaky governments.
The huge injection seemed to halt the slide, at least temporarily. But while the sum might not be too little, it still could have come too late. Talk that would have been taboo a few years ago, of the eurozone breaking up, is starting to spread.
And even if it is only talk for now, such words can have ripple effects around the world.
The Fed's Tarullo said the direct effect on U.S. banks of losses on exposure to overextended governments in Europe "would be small." But if problems were to spread more broadly through the continent, U.S. banks would face larger losses.
U.S. money market mutual funds, which are major suppliers of short-term cash to European banks through their holdings of commercial paper, also likely would be affected, Tarullo said.
Elaine Kurtenbach, Juergen Baetz and Tomoko Hosaka of the AP contributed to this report.