World stocks tumbled toward five-month lows on Wednesday and top-rated government bonds rallied as worries grew that fiscal cutbacks and stagnating factory output would prolong a global economic slowdown and aggravate Europe's debt crisis.

Tuesday's last-minute budget deal to avoid a U.S. default brought only short-term relief as the focus moved to the impact of tighter fiscal policy on the already slowing economy, illustrated by this week's weak manufacturing data.

Disappointing results from European banks -- Societe Generale becoming the latest -- also highlighted concerns the bloc's current rescue fund (EFSF) may be insufficient to stop peripheral debt problems from spreading to other countries, especially Italy and Spain.

Disappointing economic data on both sides of the Atlantic, as well as surging Italian and Spanish bond yields, has seen risk appetite plummet as pessimism about the global recovery starts to take hold with a vengeance, CMC Markets analyst Michael Hewson said.

The steam is slowly building in the sovereign debt pressure cooker as the realization slowly dawns that the EFSF doesn't have the funds to prevent a full scale financial meltdown, which would only leave the European Central Bank as the last line of defense.

MSCI world equity index <.MIWD00000PUS> fell 0.7 percent to hit its lowest since mid-March. The index is down 1.7 percent since January.

European stocks <.FTEU3> fell more than 1 percent.

Societe Generale fell 8.8 percent after warning it would struggle to reach its 2012 profit target as its exposure to Greece and a tougher economic backdrop took its toll on second-quarter earnings.

The STOXX Europe 600 Banking Index <.SX7P> fell 1.9 percent, hitting a 27-month low. Contagion concerns over Italy kept local shares <.FTMIB> under pressure.

Emerging stocks <.MSCIEF> fell 1.7 percent. The S&P 500 <.SPX> slipped into negative territory for the year on Tuesday, sending a strong bearish signal.

U.S. crude oil fell 0.4 percent to $93.43 a barrel.

Bund futures rose 7 ticks.

The premium investors demand to hold Italian and Spanish 10-year government bonds over German Bunds widened further.

Worries about Italy's huge public debt sent bond yields to 14-year highs on Tuesday and brought the euro zone's third largest economy closer to a full-scale financial crisis less than two weeks after policymakers agreed a deal aimed at preventing contagion.

The dollar <.DXY> fell 0.15 percent against a basket of major currencies while the euro rose 0.4 percent to $1.4235.

The U.S. currency fell 0.2 percent to 77.18 yen but kept distance from its record low near 76.25 on concerns about possible intervention by Japanese authorities.

The euro rose 2 percent against the Swiss franc after the Swiss National Bank announced easing measures to try and counter a recent sharp appreciation in the Swiss currency.

Investors have used the franc, backed by Switzerland's solid growth and well-balanced economy, as a safe haven against the problems of the euro zone and United States with debt.

European union