Asian stocks fell more than 2 percent and gold sat near a record above $1,660 an ounce on Wednesday, with fears increasing that Washington's efforts to cut spending will slow growth at a time when global factory output is already stagnating.

Completion of a last-gasp deal to avoid a U.S. default failed to bring any relief, as investors focused instead on how tighter fiscal policy could constrict U.S. growth and Europe's debt crisis was still worsening.

I think the conditions have completely changed this week, said Koichi Ono, senior strategist at Daiwa Securities Capital Markets in Tokyo. Until last week, people have been saying the U.S. debt ceiling was the problem. Now they talk about worries about the health of the economy.

In Europe, financial spreadbetters were calling the major share indexes to open down 1.3-1.4 percent. <.EU> <.L>

Views on the economic outlook were rapidly being revised, with JPMorgan cutting its forecast on 2012 U.S. growth to 1 percent and markets reflecting expectations of more than 80 basis points of rate cuts in Australia -- 60 basis points more than a day ago -- contributing to the Australian dollar's slide below $1.07.

U.S. consumer spending fell in June for the first time in nearly two years and incomes barely rose, signs that the economy lacked momentum as the second quarter drew to a close, data on Tuesday showed.

That followed Monday's manufacturing data from the United States, Europe and China showing growth near a standstill and last week's disappointing second-quarter U.S. GDP estimate. A series of U.S. employment data releases from Wednesday through Friday will be closely watched.

The market is standing on the edge of the cliff. U.S. manufacturing activity, growth rate, employment data are all close to a critical point, said Kim Se-jung, a strategist at Shinyoung Securities in Seoul.

Japan's Nikkei share average <.N225> fell 2.2 percent and MSCI's broadest index of Asia Pacific shares outside Japan <.MIAPJ0000PUS> fell 2.4 percent, slipping below its 200-day moving average, an indicator of the medium-term trend. <.T>

Australian shares <.AXJO> fell 2.1 percent and South Korean stocks <.KS11> dropped more than 2.5 percent. <.AX> <.KS>

EARNINGS DOWNGRADES

Asia equity markets that are particularly exposed to swings in global business cycles and commodities prices have been seeing earnings downgrades.

Taiwan, where about half of the equity market cap is in the technology sector, has been the biggest target of downward EPS revisions in Asia Pacific, according to Thomson Reuters StarMine SmartEstimates, which gives a greater weighting to the more accurate forecasters.

Analysts have in the past 30 days cut their EPS estimates for Taiwanese companies this year by an average 5.5 percent, more than twice the next market with the biggest downgrades, Australia at 2.4 percent, the SmartEstimates show.

On the flip side, frontier markets such as Vietnam and Pakistan as well as markets with companies that depend mostly on domestic demand, such as Indonesia, have seen upgrades of earnings forecasts.

On Tuesday, the S&P 500 <.SPX>, Wall Street's benchmark index, lost 2.6 percent while global stocks, as measured by MSCI's world equity index <.MIWD00000PUS>, slipped into negative territory for the year to date. <.N>

Companies, especially in the West, have spent the better part of the past three years cutting debt and improving their profit margins. With the second quarter U.S. earnings season so far showing eight in 10 companies in the S&P 500 meeting or beating estimates, the profit outlook may hold up and margins may even improve further.

With so many heightened risks right now in the market and so many of them coming from policymakers' comments, the markets are climbing a wall of worry, said Adrian Foster, head of financial markets research, Asia Pacific at Rabobank International in Hong Kong.

Yet we think that businesses had already battened down their hatches and earnings look reasonably good. So if anything, the risks out there will cause companies to cut costs further.

DEBT CRISIS

Investors who had initially cheered a deal in Washington to raise the debt ceiling quickly realized that the spending cuts called for under the plan would place a fiscal drag on an already struggling economy.

Europe's sovereign debt crisis also contributed to the gloom -- Italian bond yields hit their highest in the euro's 11-year lifetime on Tuesday.

Italy and Spain have been under increased pressure in recent weeks due to concerns that the euro zone's bailout fund is too small to protect larger peripheral economies if the contagion from the Greek crisis cannot be contained.

The implications for the Italian market and economy going through something similar to Greece is pretty frightening. People are suggesting it's not bailout-able, said Justin Gallagher, head of Sydney sales trading at RBS.

The gloom sent investors scurrying toward assets seen as offering safety in times of financial turbulence.

The Swiss franc traded around 0.7670 after rocketing to a record high around 0.7610 per dollar on Tuesday, but commodity-linked currencies such as the Australian dollar slipped as investors shed riskier assets.

The euro lost ground against the dollar, trading around $1.4200, after falling as low as $1.4149.

It is abundantly clear that market participants have little confidence in the success of the patchwork of solutions that have been discussed by euro zone policymakers thus far, said Samarjit Shankar, managing director of global foreign exchange strategy at BNY Mellon.

Traditional safe haven gold touched a record high at $1,661.14 an ounce, while oil, demand for which is influenced by growth expectations, slipped around 0.6 percent.

Japanese government debt, another safe haven, was in demand, with 10-year futures rising 0.24 point to 142.16, the highest since November, while the benchmark 10-year yield slipped 2.5 basis points to 1.015 percent.

(Additional reporting by Hideyuki Sano in Tokyo, Ian Chua in Sydney, Kevin Plumberg and Manolo Serapio Jr in Singapore and Ju-min Park in Seoul; Editing by Ramya Venugopal)