The euro fell to a fresh four-year low on Wednesday after Germany moved to sharpen financial regulation, taking down commodities and Asian stock markets in its wake as investors stampeded out of riskier assets.

Asian stocks fell sharply, as did industrial metals, on worries that the German ban on naked short-selling of some securities, coupled with strengthening financial regulation in the United States, would derail the global economic recovery.

Analysts said although it was still a unilateral move by Berlin, European markets were likely to take a hit later in the day.

If you combine this new regulation in Germany with all the other negative headlines we've been having in the past few days, most probably European markets will react negatively, said Pierre Faddoul, a credit analyst at Aberdeen Asset Management in Singapore.

The ban on naked short sales of euro-denominated government bonds, credit default swaps based on those bonds, and shares in Germany's 10 leading financial institutions was announced after European markets closed on Tuesday.

In naked short selling, a trader sells a financial instrument short, betting that its price will fall, without first borrowing the instrument or ensuring that it can be borrowed, as would be done in a conventional short sale.

Germany just switched off the financial lights in Europe, said a senior forex trader at a European bank in Singapore.

The euro slipped as low as $1.2143 on trading platform EBS, its weakest level since April 2006 and taking it losses so far in 2010 to more than 15 percent. It later recovered to around $1.2215, but the bounce could be short-lived.

Stocks and CDS trading are now regulated. The government bond market is supported by the European Central Bank's buying. So investors have no place but the currency market to express their views on Europe, said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital.

High-yielding currencies like the Australian and New Zealand dollars also fell on the move.

Meanwhile, the dollar and the yen benefitted as players sought the safety of the dollar and the low-yielding Japanese currency.

The dollar index, which tracks the U.S. unit's performance against a basket of major currencies, rose to a 14-month high of 87.458 <.DXY> before slipping back to 87.135.

The MSCI index of Asia-Pacific shares outside of Japan <.MIAPJ0000PUS> was down over 2 percent at a four-month low at 381.38 points. It has fallen about 4.7 percent since the start of the week.

Japan's Nikkei average <.N225> fell as much as 1.8 percent to a three-month low on the regulation worries and as the weak euro dragged on exporters.

Germany's move to regulate naked short selling has heightened uncertainty about the trading environment of financial markets, leading investors to avoid risks, said Yumi Nishimura, deputy general manager at Daiwa Securities Capital Markets.

The Australian dollar fell to an eight-month low at $0.854, with charts suggesting more losses as investors dumped high-yielding currencies. The kiwi was down 0.6 percent at $0.6854

Australian shares <.AXJO> also hit an eight-month low.

Industrial metals fell as the global economic recovery was thrown into doubt.

London three-month copper dropped $135 to $6,565 a metric ton, or over 2 percent. Zinc prices in Shanghai fell more than 5 percent, while London nickel dropped 4.7 percent on the fall in the euro.

Crude oil futures slid to a seven-month low, reflecting falls in other markets.

The flight to safety benefited U.S. Treasuries. The yield on the benchmark 10-year note eased to 3.33 percent from 3.49 percent late on Monday.

Gold initially gained on a safe-haven bid, but then fell back on fears of a correction. Spot gold hit an intraday high of $1,227.10 an ounce before falling to $1,213.70 by 10:50 p.m. ET, down $6 from New York's notional close on Tuesday.

Gold struck a record of $1,248.95 an ounce on Friday on fears that euro zone austerity measures could impede, rather than aid, a recovery, but analysts say the market may be technically overbought.

(Editing by Neil Fullick)

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