The fiscal tightening from Japan, euro zone, and the United States will lead to slower growth and lower inflation, which is leading to added selling pressure on world financial markets on Thursday, the manager of the world's biggest bond fund said.

Bill Gross, the co-chief investment officer of Pimco and manager of the firm's Total Return Fund, told Reuters that fiscal tightening momentum is increasing in almost every corner of the world.

That comes as financial markets are exhibiting a mini-relapse of a flight to liquidity as hedge funds and other leveraged positions are liquidated to preserve capital, Gross said.

Indeed, investors dumped everything, but Treasuries to raise cash. All major U.S. equity indexes dropped over 3 percent mid-Thursday while Treasuries rallied with the two-year note at only 0.7 percent.

The International Monetary Fund on Wednesday pressed Japan to begin a credible fiscal program which includes a 5 percent sales tax increase, while French President Nicolas Sarkozy proposed deficit targets for France, Gross noted.

Also, Germany passed this year a balanced budget amendment mandating balanced budgets by 2016, he added.

Gross helps oversee over $1 trillion in assets, mostly fixed income, at the Newport Beach, Calif.-based Pimco and runs the $224.5 billion Pimco Total Return Fund.

Gross said Greece steals the spotlight. The fiscal tightening ahead for Greece and the peripherals is obvious and for Greece, at least, is a condition of the IMF/European Union future funding arrangement. Fiscal tightening momentum is apparent in the U.S., examples being New Jersey and just this week California. They are proposing budget slashes in the billions.

(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama and Diane Craft)

Germany Japan California Inflation