A Chinese investor takes a break from checking stock prices at the Zhong Xin securities stock trading house in Beijing, China. Chinese regulators today shifted into damage control, denying rumors of plans for a 20 percent capital gains tax on stock investments as the benchmark Shanghai Composite Index opened lower but then regained lost ground today following its worst plunge in a decade. Elizabeth Dalziel • Associated Press

Analysts said the selloff was most likely a correction to cool overheating markets.

"There is definitely a case for a market correction but as of yet I would not worry about the economic impact," said Holger Schmieding, chief European economist at Bank of America in London. "This is not something to worry about. There are little ramifications beyond the markets being immediately affected."

In Britain, the benchmark FTSE 100 Index lost 1.82 percent, while France's CAC 40 fell 1.29 percent and Germany's DAX Index slid 1.53 percent. In the U.S., the Dow Jones industrials were fluctuating but stayed positive, up 53 points at the 12,270 level in early afternoon.

The selloff was more pronounced in Asia, with indexes in Japan, South Korea, Singapore, Malaysia, India and Australia sliding more than 2 percent after Wall Street suffered its worst day yesterday since the Sept. 11, 2001, terrorist attacks.

Japan's Nikkei 225 stock index tumbled 2.85 percent to 17,604.12, while Philippine stocks plunged 7.9 percent, their worst drop since 1997, at the height of the Asian financial crisis.

But several Asian markets also trimmed big early losses as the day progressed, though analysts warned that markets would likely remain volatile for a while.

"We don't need to worry about a big reduction from here, but this correction could continue for the next couple months," said Shinichi Ichikawa, an equity strategist with Credit Suisse in Tokyo.

STOCKS REBOUND IN CHINA

Meanwhile, China's Shanghai Composite Index bounced back 3.9 percent to close at 2,881.07, rebounding from its 8.8 percent plunge yesterday — its biggest drop in a decade — which triggered the global sell-off.

Bullish comments in China's state-controlled media appeared to reassure anxious domestic investors, who account for virtually all trading.

China will focus on ensuring financial stability and security, the official Xinhua News Agency cited Premier Wen Jiabao as saying in an essay due to be published in Thursday's issue of the Communist Party magazine Qiushi.

Authorities also denied rumors of a 20 percent capital gains tax on stock investments — speculation on which played a role in yesterday's plunge.

But many analysts cautioned against focusing only on China's role.

"The selloff in equities cannot be blamed wholly on China. This is case of the market flying too close to the sun, and the hot money collapsing," said Torben Krogh Nielsen, an analyst with Saxobank. "It's a correction that's been seven months coming."

"If there's a larger message behind all this, it's that the era of cheap money is over and you can't blame China for that," concurred David Karsboel, head of market strategy for Saxobank in Copenhagen, Denmark.

SOME BARGAIN HUNTING BEGINS

Some investors used the drop as an opportunity to go bargain-hunting. Malaysian stocks, after falling as much as 8.2 percent, closed down 3.3 percent. Australian stocks closed down 2.7 percent after falling as much as 3.5 percent.

Many Asian markets were due for a correction after their recent spectacular performance, analysts said.

Benchmark indexes in China, Australia and Singapore had all hit records in February. Before this week's plunge, Malaysian stocks had gained 17 percent this year, while Philippine shares had climbed about 12 percent.

"A lot of that exuberance about just buying anything at all costs just starts to evaporate if the market has big falls like this," said David Halliday, associate director at Macquarie Equities. "I think the important thing to note is that this hasn't been triggered by an economic, financial or political crisis."

Japan's Chief Cabinet Secretary Yasuhisa Shiozaki echoed that sentiment, trying to quell concerns about the Tokyo market by stressing that overall fundamentals in Japan were still strong.