Shares in Europe and Asia slid more than 2.0 percent as bank stock got hammered, and investors around the world flocked to government debt amid persistent worries about the global outlook for the economy and the financial sector.

Fears about the world banking system put in question a U.S. government plan to rescue mortgage finance companies Fannie Mae and Freddie Mac , sending the U.S. dollar to a fresh record low against the euro.

Investors also bid up the price of safe-haven government debt and gold.

But the U.S. Securities and Exchange Commission said it will issue an emergency rule later on Tuesday to stop "naked" short selling in major financial firms, including Fannie and Freddie, pillars of the U.S. mortgage market.

After rebounding, the S&P financial index <.GSPF> turned lower and fell almost 3.0 percent, hitting levels last seen in May 1997.

The KBW Banks index <.BKX> also rebounded, but closed 3.1 percent lower after touching almost 14-year lows.

Financial stocks tumbled just before the close because of disagreement between Treasury Secretary Henry Paulson and U.S. senators over how to move forward on Freddie and Fannie.

"Paulson is asking for a blank check and the (Senate) committee is hesitant at this point," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

"Some of the members are asking how much is this going to cost?"

The rout in financial shares was particularly acute in Europe and Asia.

"We’re back into the panic mode we experienced back in mid-March. The distrust is at a very high level and it is totally justified," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management in Paris.

Fed Chairman Ben Bernanke provided little comfort for investors anxious about the economy, saying in testimony before the Senate Banking Committee that financial markets and institutions remain under "considerable stress."

Bernanke’s comments about increased risks to inflation and economic growth were expected, but caused pause, said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

"It’s still alarming to hear and the market did react to this news, given Bernanke didn’t sugar-coat the situation," Goldman said.

The Dow Jones industrial average <.DJI> slid 93.47 points, or 0.85 percent, at 10,961.72. The Standard & Poor’s 500 Index <.SPX> fell 13.34 points, or 1.09 percent, at 1,214.96. The Nasdaq Composite Index <.IXIC> added 2.84 points, or 0.13 percent, at 2,215.71.

Nasdaq gained ahead of results to be released after markets closed on Tuesday by technology bellwether Intel Corp .

But shares of Fannie Mae slid 27 percent; Freddie Mac tumbled 26 percent. The two mortgage finance giants guarantee almost $5 trillion in U.S. mortgages.

Shares of General Motors , a Dow component, slid 5.0 percent after the automaker announced a restructuring plan and said it is suspending its dividend as part of efforts to bolster its finances.

In Europe, the FTSEurofirst 300 <.FTEU3> index of top European shares unofficially ended 2.1 percent lower at 1,110.09 points, after falling by more than 3.0 percent in earlier trade. It was the index’s lowest close since May 2005.

Banks bore the brunt of the slide with Fortis the session’s biggest loser. The stock sank 11 percent on worries the Belgian-Dutch financial services group might have to raise more funds and after the Dutch market regulator said it was looking into the company’s funding plan.

Fortis said it did not envisage any additional capital increase.

Government debt rose though U.S. Treasury debt prices pared some gains, losing some of their safe-haven allure as Wall Street attempted to rebound.

The price of the U.S. long bond turned lower after being up most of the day.

The benchmark 10-year U.S. Treasury note rose 8/32 to yield 3.83 percent. The 30-year U.S. Treasury bond slipped 5/32 to yield 4.46 percent.

"We’re seeing broad based risk aversion across asset classes," said Niels From, chief analyst at Nordea.

The U.S. dollar fell against major currencies, with the U.S. Dollar Index <.DXY> down 0.27 percent at 71.758. Against the yen, the dollar was down 1.30 percent at 104.76.

The euro fell 0.02 percent at $1.59.

U.S. crude settled down $6.44 at $138.74 a barrel. London Brent crudefell $5.17 to $138.75.

Gold pared gains after hitting a four-month high. August futures settled up $5 at $978.70 an ounce in New York.

"The problems on the equity markets, uncertainty, and general risk aversion are all bullish for gold at the moment," said Lehman Brothers analyst Michael Widmer.

Overnight in Asia, stocks fell to a two-year low as investor confidence waned in regional banks, which face high inflation, tighter lending standards and massive volatility from overseas markets.

Japan’s Nikkei share average <.N225> ended down 2 percent at its lowest level since April 1. The MSCI pan-Asia equity index <.MIAS00000PUS> dropped 1.9 percent after earlier hitting a near two-year low.

(Reporting by John Parry, Nick Olivari, and Santosh Menon, Kirsten Donovan, David Sheppard and Jan Harvey in London and Blaise Robinson in Paris)

(Reporting by Herbert Lash;editing by Gary Crosse.)