World Markets Sag

World markets fell Monday, after new figures showed Japan's economy contracted at its quickest pace in 35 years and a weekend summit of Group of Seven finance ministers provided few concrete proposals to counter the economic crisis.

Drops in Europe followed losses in Asia, but trading volumes were subdued as U.S. markets remained closed for Presidents Day.

By late afternoon in mainland Europe, Britain's FTSE 100 fell 0.6 percent to 4,164.20, Germany's DAX sank 0.4 percent to 4,396.80, and France's CAC 40 dropped 0.4 percent to 2,987.42.

Japan's worse-than-expected fourth quarter GDP numbers were a sobering reminder of the toll the worst economic downturn in decades is having on Asia's export-driven economies. The world's second-biggest economy shrank 3.3 percent from the previous quarter, or at an annual pace of 12.7 percent.

In Europe, financial stocks dragged markets lower. Shares in Lloyds Banking Group were volatile in London following the company's revelation Friday of larger-than-expected losses at recently acquired Halifax-Bank of Scotland and on market fears the combined company may be headed for nationalization. Shares dropped 20 percent in early trading, but regained ground to trade up 3.1 percent. Shares had dropped 30 percent on Friday.

Insurance companies also dragged the FTSE 100 down. Legal & General Group Plc fell 7.1 percent, Prudential lost 5.8 percent and Aviva slipped 4.6 percent.

"Whereas before people were just selling banks, now they are looking at the risk involved with other financials," said Jane Coffey, head of equities at Royal London Asset Management.

Investors seemed disappointed after finance chiefs from the Group of Seven developed countries finished their meeting in Rome with pledges to work together to boost growth and unemployment, but stopped short of concrete measures.

Increasingly, investors are unconvinced world governments are acting quickly enough to counter the economic crisis, analysts said.

"The global recession is deeper than anticipated. At the same time policy makers are failing to deliver measures to address the problems," said Dariusz Kowalczyk, chief investment strategist for SJS Markets in Hong Kong. "It seems that what they're doing is too little too late."

In Asia, Japan's Nikkei 225 stock average edged down 0.4 percent to 7,750.17, and Hong Kong's Hang Seng Index dropped 0.7 percent to 13,455.88. South Korea's Kospi lost 1.4 percent.

India's benchmark tumbled 3.6 percent after the government, proposing its interim budget, offered no new stimulus measures. Markets in Australia and Singapore also retreated.

In Japan, several exporters were hurt by the data showing the economy sank deeper into recession.

The GDP figures represent the steepest drop for Japan since the oil shock of 1974 and outpaced output drops in the U.S. and the euro zone. A survey of economists by Kyodo news agency had projected an 11.6 percent annualized contraction.

"It's clearly very shocking data," said Clive McDonnell, head of Asia strategy at BNP Paribas Securities in Hong Kong. "The drop is certainly beyond our own quite negative expectations. (Japan's) policy response has not been as effective."

Bucking the wider trend, Shanghai's benchmark climbed 3 percent to 5 1/2-month high to extend China's recent really.

Since the start of the year, Shanghai's index has risen more than 31 percent. But analysts say the rise has been driven not by economic fundamentals, but by a surge in bank lending that has sent money flowing into the market.

"The economic fundamentals are not strong enough to support the market's rise," said Zhang Xiang, an analyst for Guodu Securities in Beijing. "The market is in an irrational state, which is not going to last long."

U.S. equity markets are closed Monday for Presidents Day. On Friday, the Dow fell 1 percent to 7,850.41, its lowest close since Nov. 20. The S&P also fell 1 percent, ending its week off 4.8 percent.

In the coming days, investors will be watching President Barack Obama, expected to sign the country's $787 billion economic stimulus measure on Tuesday. He plans to outline steps to stem home foreclosures on Wednesday, though analysts say investor enthusiasm surrounding the pending announcement is fairly low.

Oil prices were mostly steady after jumping 10 percent last week, trading 7 cents lower at $37.44 for a barrel of light, sweet crude for March delivery. The contract rose $3.53 to settle at $37.51 a barrel on the New York Mercantile Exchange on Friday.