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German trading curbs hit markets hard

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German Chancellor Angela Merkel addresses the parliament about the 750 billion euro rescue package in Berlin, Wednesday.

German Chancellor Angela Merkel addresses the parliament about the 750 billion euro rescue package in Berlin, Wednesday.

Markus Schreiber, Associated Press

LONDON — World markets dropped sharply Wednesday after Germany's new curbs on traders — a unilateral and unexpected attempt to reduce volatility in financial markets — unsettled investors.

The euro, meanwhile, recovered from four-year lows against the dollar — reached in the aftermath of the ban — as experts suggest European central banks are considering intervening in the markets to slow the currency's drop. The European Central Bank declined to comment.

By late-afternoon, the euro was up 1.3 percent on the day at $1.2342, having earlier dropped to $1.2146, its lowest level since April 2006.

Stock markets didn't get any such reprieve.

In Europe, Britain's FTSE 100 index of leading shares closed down 149.26 points, or 2.8 percent, at 5,158.08 while Germany's DAX plunged 167.26 points, or 2.7 percent, to 5,988.67. The CAC-40 in France ended 105.65 points, or 2.9 percent, lower at 3,511.67.

U.S. stocks failed to sustain an early flourish and the Dow Jones industrial average dropped 135.28 points, or 1.3 percent, at 10,375.67 and the Standard & Poor's 500 index fell 14.59 points, or 1.3 percent, at 1,106.21.

Once again, Europe's debt crisis took center stage — this time the focus was on Germany, after its regulator's surprise decision Tuesday to ban so-called naked short-selling of eurozone government bonds and shares in ten key German financial institutions until March 31.

In a typical short sale, a trader sells borrowed shares in hopes of buying them cheaper later and profiting on the difference. A "naked" short is when traders sell shares without borrowing them first.

The unexpected decision sent shock waves through the markets, especially as it was done unilaterally by the eurozone's largest economy. The move came just as lawmakers begin a debate over authorizing Germany's euro123 billion contribution to an emergency support fund to protect the eurozone's highly indebted countries from default and reassure financial markets.

"Investor confidence has been seriously shaken and once again it's the Europeans doing all the damage," said David Jones, chief market strategist at IG Index.

"The euro managed to bounce back from four-year lows against the dollar on the back of speculation that the ECB was preparing to step in and prop up the troubled currency — the first such intervention since 2000," he added.

While finding some support, the euro is still clearly under severe strain as Europe's policymakers try to steer a path out of a debt crisis that has already seen Greece have to go cap in hands to its partners in the eurozone and the International Monetary Fund for emergency funds.

Michael Woolfolk, senior currency strategist at Bank of New York Mellon, said the "crisis atmosphere" building in Europe could well see the euro slid back to its launch rate of $1.18 soon.

In the markets, the ban also brought back memories of a widely considered unsuccessful attempt by the U.S. and British authorities to prop up stock markets at the end of 2008 in the wake of the collapse of Lehman Brothers and the ensuing crisis that gripped the banking sector.

"If anything, the bans in 2008 exacerbated market declines and volatility, as investors took fright and bailed out of the whole sector and the Germans run the risk of causing the same mayhem," said Michael Hewson, an analyst at CMC Markets.

"The ban is even more curious with respect to the shares of the financial institutions involved, given that their share prices have been relatively orderly over the past few days and weeks," he added.

The ban applies to several banks — Aareal Bank AG, Commerzbank AG, Deutsche Bank AG and Deutsche Postbank AG. It also covers insurer Allianz SE; reinsurers Hannover Re AG and Munich Re AG; Generali Deutschland Holding AG, MLP AG, and Frankfurt stock exchange operator Deutsche Boerse AG.

Investors will now wait to see if others do something similar in the days ahead — a number of analysts think that other eurozone countries, at the very least, will likely follow Germany in banning naked short selling.

In Asia, shares dropped too in the wake of the German decision.

Japan's benchmark Nikkei 225 stock average dropped 55.80 points, or 0.5 percent, to 10,186.84. South Korea's Kospi index lost 0.8 percent to 1,630.08 and Australia's S&P/ASX 200 index was off 1.9 percent at 4,387.10.

Benchmarks in Singapore, India and Indonesia all fell more than 1 percent and Hong Kong's Hang Seng index lost 1.8 percent to 19,583.22.

Benchmark crude for June delivery was down 12 cents to $69.29 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 54 cents to settle at $69.41 on Tuesday.

Associated Press Writer Alex Kennedy in Singapore contributed to this report.