By Richard Leong
NEW YORK (Reuters) - Shares on world markets slumped and the euro slid further on Wednesday as investors worried that the fiscal challenges facing U.S. President Barack a day after his re-election could lead to a new recession.
Fresh concerns about Europe's debt crisis added to the jitters among investors, who scrambled for safer assets. Benchmark U.S. Treasury yields were set for their biggest one-day fall since May.
Markets doubt that Obama can reach a timely deal with Republican lawmakers in the lame-duck session of a divided Congress to avert the "fiscal cliff" - some $600 billion in automatic tax hikes and spending cuts set to kick in on January 1.
"The minute such a deal is cut, we'll boom. If one is not cut - and soon - we may well double-dip into recession," said Robert L. Reynolds, president and chief executive of Putnam Investments in Boston.
"This upcoming lame-duck session may just be the most consequential in our lifetimes. The stakes are high and the time is short," he said in a statement.
Todd Schoenberger, managing principal at the BlackBay Group in New York, said "traders on the floor are thinking: 'Before the election, President Obama wasn't able to resolve the fiscal cliff, so what makes you think he's going to be able to do it after the election?' That's the big issue right now."
Traders were also anxious about a vote in Greece's parliament later on Wednesday on an austerity package needed to secure a fresh injection of international aid and avert bankruptcy, which would rock the euro zone and world markets.
European Central Bank President Mario Draghi said the ECB expects the euro zone economy to remain weak "in the near term" and that the problems were spreading to Germany.
"If the Greek vote doesn't go through, there is a lot of downside risk to the euro as talk of a Greece exit will re-emerge," said Jane Foley, senior currency strategist at Rabobank.
The drop in U.S. equities was similar to the one on the day after Obama won his first White House term in 2008.
The Standard & Poor's 500 index was set for its worst one-day loss since June. It was last down 31.44 points, or 2.20 percent, at 1,396.0078.
The Dow Jones industrial average was down 291.81 points, or 2.20 percent, at 12,953.87. The Nasdaq Composite Index was down 72.15 points, or 2.40 percent, at 2,939.78.
Energy shares tumbled as the sector will likely see more regulation in Obama's second term, with less access to federal lands and water even as he promotes energy independence. James River Coal
The FTSE Eurofirst 300 index of top European shares closed down 1.4 percent, its biggest drop in two weeks, at 1,099.35.
Bucking the market were French banking stocks. They were helped by BNP Paribas'
European and Asian stock markets rose initially on relief buying when U.S. election results for the White House and Congress were clear and reinforced expectations the Federal Reserve's ultra-loose monetary policy will continue.
The MSCI world equity index was briefly 0.4 percent higher before falling 1.3 percent to 327.25.
As worries over the U.S. fiscal cliff and Greece's austerity votes moved to the forefront, investors flocked to the safety of low-risk assets, including the greenback and U.S. and German government bonds.
The U.S. dollar recovered from early losses, resuming its rally during this week's tense run-up to the U.S. election. The dollar index that measures the greenback against a basket of major currencies was up 0.2 percent , touching a two-month high earlier at 80.795.
The euro on the other hand fell 0.4 percent to $1.2762, retreating from a session high of $1.2876.
Gold turned lower after hitting a two-week high. It was last 0.3 percent lower at $1,720.40 an ounce.
In the bond market, the yield on 10-year Treasury notes was 1.6249 percent, on track for its biggest single-day drop since May 30, according to Reuters data.
German Bund futures climbed 68 basis points, or 0.5 percent, at 142.77.
Worries about weaker energy demand caused a sell-off in the oil market after it rallied on Tuesday. Brent crude oil fell $4.25 to settle at $106.82 a barrel and U.S. oil futures settled down $4.27 at $84.44.
(Additional reporting by Chuck Mikolajczak, Herbert Lash in New York; Marc Jones, Richard Hubbard, in London; Editing by Dan Grebler)