The global economy stumbled deeper into crisis as stock markets slumped further on Tuesday, with investors losing confidence that the United States and Europe can rein in their debt burdens quickly and avert a double-dip recession.

Even as Asian equity markets pulled back from another day of staggering losses as they closed, European shares tumbled for an eighth session running, with news of an unexpected drop in British factory output in June highlighting the weakness of the economy.

The worsening market trauma has piled pressure on the U.S. Federal Reserve to announce fresh measures of support for the U.S. economy at a regular policy meeting on Tuesday, but analysts said its options are limited.

You have got to a situation of capitulation and panic selling, and these things will keep running until we get some sort of policy response, said Peter Hickson, managing director of global commodity research at UBS.

Even policy response these days seems to be impotent in terms of the market sentiment at the moment. The market is asking whether policymakers have many more bullets to fire.

Investors fear that, with confidence in the global economy's prospects evaporating, financial markets will remain in a slump, feeding a vicious circle of pessimism.

As of Monday, stock losses had wiped some $3.8 trillion from investor wealth globally in the recent rout as buyers rushing for perceived safety in the Japanese yen, the Swiss franc and gold, which hit another record high on Tuesday.

MSCI's all-country world index was down 1.2 percent, and has now shed about 20 percent since peaking in May. The market rule of thumb is that a fall of that magnitude constitutes a bear market.

CHINA INFLATION DASHES STIMULUS HOPES

As the flight from risk continued in Asia and Europe on Tuesday, there was more bad news, this time from China, the stuttering global economy's main engine room.

Official data showed China's industrial output grew at a slower pace and its annual inflation rate unexpectedly quickened to 6.5 percent in July.

The inflation pressure puts the country's central bank in a bind as it tries to keep prices in check without dragging down an economy that already faces increasing threats from abroad.

It may not be in a position to reprise its 2008 role of lifting the global economy. When the Lehman Brothers bankruptcy triggered a worldwide slump, China implemented a stimulus package that helped buffer its own economy and buoy the world.

However, some analysts called on Beijing to act.

It's time for Beijing to announce to the whole world that it will try to stimulate domestic demand again, said Tang Yunfei, an analyst with Founder Securities in the Chinese capital.

Global leaders have failed to reverse sliding markets since a blow was dealt to investor confidence by Standard and Poor's downgrade of the U.S. sovereign credit rating last week.

The downgrade heightened concerns that the twin-pronged crisis of a worsening euro-zone debt problem and a faltering U.S. economy raised the risks of a double-dip recession.

The European Central Bank (ECB) swept into the bond market to buy Italian and Spanish debt and sling a safety net under the euro zone's third- and fourth-largest economies on Monday. But bickering has persisted in Europe over a longer-term rescue plan.

In the United States, President Barack Obama called on Monday for urgent action on the U.S. budget deficit, but his proposal on taxes was promptly rebuffed by Republicans.

A pledge by G7 finance ministers and central banks on Sunday to provide extra cash if markets seize up has also provided little solace as their credibility wore thin.

CREDIBILITY DEFICIT

Four years into the financial crisis, it is becoming increasingly clear that the biggest deficit is not in credit, but credibility, Harvard University economist Kenneth Rogoff wrote in the Financial Times.

Markets can adjust to a downgrade of global growth, but they cannot cope with a spiraling loss of confidence in leadership and a growing sense that policymakers are disconnected from reality.

Major indexes in Asia slumped in early trade following a drop of more than 6 percent on Wall Street on Monday, and although some staged a sharp rebound, Hong Kong shares recorded their biggest one-day decline since the 2008 crisis.

European bourses put in a short-lived attempted at gains at the open, but succumbed to the bearish mood. The FTSEurofirst 300 index of top European shares lost ground for the eighth session in a row, hitting a two-year low.

The speed and degree of deterioration in the situation is akin to what we saw during the failure of Lehman Bros, through the dot.com burst ... and during the 1982 recession, said Warren Hogan, chief economist at ANZ Banking Corp in Australia.

We are looking at markets pricing for some sort of financial crisis. I think we are at a critical period now.

Concerns mounted that Asia would inevitably feel the cold wind of the West's slowdown.

This is the first time in several years that all three major economic regions are feeling economic distress at the same time, said Keith Ducker, chief investment officer of Tora, a dark pool operator.

FOCUS ON THE FED

With U.S. stock index futures pointing to further steep losses for Wall Street on Tuesday, attention focused on a meeting due later of the Federal Open Market Committee as a possible prop for the market, though the Fed is expected to keep interest rates unchanged.

Speculation is growing that Chairman Ben Bernanke may do more to help restore confidence with possibly another round of asset purchases, said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, in Brussels.

On the political front, Obama said on Monday he hoped the loss of the prized AAA credit rating would add urgency to U.S. budget cutting plans.

He called for both tax hikes and cuts to welfare programs as part of the $1.5 trillion in deficit reduction that a special committee would deliver in late November, but Republican House Speaker John Boehner once again rejected the call, saying tax hikes were simply the wrong approach.

Obama also spoke with the leaders of Italy and Spain, welcoming measures by their governments to address the economic turmoil in Europe.

Traders said the ECB was again seen buying Italian and Spanish debt on Tuesday after it agreed on Sunday to broaden its bond-buying program for the first time to halt an attack on the Mediterranean countries. Italian and Spanish yields declined sharply.

The ECB move was seen as only a temporary solution, however, due to the sheer size of Italy's bond market -- $1.6 trillion -- and there are doubts in the market it can be sustained.

(Editing by Lincoln Feast)