(Updates through close of U.S. trading)
By David Randall
NEW YORK, Dec (Shanghai: 600875.SS - news) 21 (Reuters) - World stock markets continued a week-long sell-off on Friday as the threat of a U.S. government shutdown and comments from a top White House trade adviser casting doubt that a breakthrough on trade tensions with China can be achieved compounded investor anxiety that global economic growth is slowing.
MSCI (Frankfurt: 3HM.F - news) 's index of global equities fell 1.5 percent, dragged down by broad declines in Europe and Asia. On Wall Street, U.S. stocks initially moved higher after Commerce Department data showed the U.S. economy is on pace to grow by 3 percent this year. But they pared their gains and then turned lower.
The Dow Jones Industrial Average fell 414.23 points, or 1.81 percent, to 22,445.37, the S&P 500 lost 50.8 points, or 2.06 percent, to 2,416.62 and the Nasdaq Composite dropped 195.41 points, or 2.99 percent, to 6,333.00.
Stocks fell after Trump administration trade adviser Peter Navarro told Nikkei it would be "difficult" for the United (Shenzhen: 000925.SZ - news) States and China to reach a long-lasting trade agreement that would end the simmering trade war between the world's two largest economies.
The tech-heavy Nasdaq Composite dropped into a bear market, defined as a 20 percent decline from its recent highs, for the first time since the global financial crisis in 2008. Broad stock markets in the United States and Europe are on pace for the worst quarter since 2008, while the Dow finished its worst week since late 2008.
"China is cooling and the euro zone is slowing down, and some of the economic indicators from the U.S. have been a bit soft recently, but yet the Fed hiked rates and suggested that two more interest rate hikes were lined up for 2019," said Michael Hewson, chief markets analyst at CMC Markets (LSE: CMCX.L - news) in London.
He said speculation that the U.S. economy could be headed for a recession has picked up, dampening global sentiment. "Fear about a U.S. government shutdown is playing into the mix too."
U.S. President Donald Trump has refused to sign legislation to fund the U.S. government unless Congress authorizes money for a Mexico border wall, thus risking a partial federal shutdown on Saturday (Shenzhen: 002291.SZ - news) .
"Political brinkmanship in Washington is further heightening market uncertainty," said Westpac economist Elliot Clarke.
Adding to the air of crisis was news that U.S. Defense Secretary Jim Mattis had resigned after Trump announced a withdrawal of all U.S. forces from Syria and sources said a military pullback from Afghanistan was also planned.
Oil prices, which slid just over 4 percent on Thursday, tumbled to their lowest since the third quarter of 2017. U.S. crude fell 1 percent to $45.41 a barrel, while Brent fell 1.5 percent to $53.52.
Japan's Nikkei lost 1.1 percent to close at its lowest since mid-September last year, after giving up 5.6 percent this week. Australian stocks slipped 0.7 percent, hovering just above a two-year trough hit earlier in the session.
The mood change has triggered a rush out of crowded trades, including massive long positions in U.S. equities and the dollar and short positions in Treasuries.
Lipper data on Thursday showed investors pulled nearly $34.6 billion out of stock funds in the latest week and were heading for the biggest month of net withdrawals on record.
Benchmark 10-year Treasury notes last rose 2/32 in price to yield 2.783 percent, from 2.789 percent late on Thursday.
As recently as October, yields had been at a seven-year high of 3.261 percent.
The dollar index rose 0.76 percent, with the euro down 0.74 percent to $1.1359. (Reporting by David Randall; Editing by Dan Grebler and James Dalgleish)