Governments are using "historically strong medicines to try to revive a patient that is looking very weak at the moment and so far almost everything that has been used has failed to work," said Henk Potts, strategist at Barclays Stockbrokers.

Investors hoped the measures would support in the long term, but there was a lot of nervousness before they saw the results of the U.S. government's efforts on the economy, he added.

The pessimism over a compromise deal on a $789 billion U.S. package, which helped Wall Street shares to gain overnight, evaporated after investors scrutinised a raft of disappointing corporate results and macroeconomic data.

Figures showed Japanese wholesale prices dropped in the year to January, the first drop in five years, bringing the world's second-largest economy closer to its second bout of deflation in a decade as the economy slipped deeper into recession.

Swiss engineering group ABB posted an 88 percent fall in fourth-quarter net profit, oil major Total reported an 8 percent drop in profits due to lower oil prices and output, while banking group KBC booked a $3.4 billion loss due to writedowns.

"Asides from the stimulus package, the big news has been the large stake in Rio Tinto being sold to Chinalco," said Andrew Turnbull, senior sales manager at ODL Securities.

"The deal is said to be the largest overseas deal by the Chinese and really does show how desperate for cash Rio Tinto has become," he said.

Rio Tinto will sell $12.3 billion in asset stakes to Chinalco and raise a further $7.2 billion by issuing China's top aluminium maker convertible notes to cut debt, the global miner said. Rio shares were up 1.2 percent. The negative market sentiment spread to other sectors such as mining, electricity, telecommunications and retail.

Miners, struggling due to falling prices and slowing demand of metals, fell again. BHP Billiton, Anglo American, Xstrata and Antofagasta fell between 0.8 percent and 3.3 percent. Among electricity companies, Enel dropped 2 percent and Renewable Energy slipped 1.4 percent.

France's EDF fell 7 percent after it posted a dip in 2008 core earnings, hit by a larger-than-expected 1.2 billion euro ($1.55 billion) charge related to French regulated tariffs.

Britain's BT Group dropped more than 5 percent after its core earnings slumped 9 percent in the third quarter and pre-tax profits slumped 81 percent. Among gainers, French carmaker Renault rose 5.9 percent after it dropped its once sacrosanct 2009 profit targets and said it would focus on cutting inventories this year.

Across Europe, the FTSE 100 index, Germany's DAX and France's CAC 40 were down 1.1-1.9 percent.

Nikkei hits 2-wk closing low on yen, U.S. bank plan

The Nikkei stock average slid 3 percent on Thursday to post its lowest close in over two weeks, as disappointment over a U.S. bank rescue plan hurt financial shares and a firmer yen dragged down exporters.

One bright spot was gold and copper producer Sumitomo Metal Mining, which gained 5.3 percent after gold prices jumped to a 6-½ month high on Wednesday as risk aversion prompted investors to buy gold and bullion-backed exchange-traded funds as a safe haven.

After staying out of the market on Wednesday due to a national holiday, Japanese investors on Thursday played catch-up with Wall Street's falls.

U.S. Treasury chief Timothy Geithner on Tuesday unveiled a new bank rescue plan that would put $2 trillion to work mopping up bad assets and restoring credit, but stock markets plunged on fears it wouldn't work. U.S. stocks recovered some ground on Wednesday.

"Investors were disappointed as the U.S. bank rescue plan turned out to be rather small and it gave the impression the establishment of a 'bad bank' might not proceed smoothly," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

"Additionally, even though both the House and the Senate agreed on the stimulus package, there's a concern that the U.S. market may not gain on the news as it could merely see it as a sign that another event had passed."

The benchmark Nikkei shed 240.58 points to 7,705.36, its lowest finish since Jan. 26. The broader Topix lost 2.3 percent to 760.29. Handing a big victory to President Barack Obama in his effort to pull the economy out of a tailspin, U.S. congressional negotiators on Wednesday reached a deal on $789 billion in emergency spending and tax cuts.

A majority of negotiators approved the deal, setting up votes in the House potentially on Thursday and possibly later that evening in the Senate.

"It (the agreement) had been largely expected," said Kazuhiro Takahashi, general manager at Daiwa Securities SMBC. "Investors can't actively move until they see its impact, including how and when the tax cuts will effectively help out consumers."

After the market close, Japanese electronics maker Pioneer Corp said it would exit the flat TV business and consider moving its optical disk operations into a joint venture as part of a package of restructuring steps.

The stock ended the day up 0.6 percent at 178 yen. Banking shares fell after the U.S. bank rescue plan failed to buoy investor confidence. Japan's top lender Mitsubishi UFJ Financial Group shed 3.5 percent to 468 yen, while No.2 Mizuho Financial Group lost 4.6 percent to 209 yen.

Nomura Holdings, the country's biggest brokerage, tumbled 5.9 percent to 479 yen. Exporters also came under pressure as the Japanese currency gained against the dollar, which dipped roughly 0.2 percent to 90.15 yen. Investors dislike a stronger yen as it eats into Japanese exporter profits when repatriated.

Canon dropped 6.6 percent to 2,405 yen and Kyocera Corp lost 5 percent to 5,760 yen. Toyota Motor Corp fell 2.9 percent to 3,050 yen.

Asahi Breweries declined 3.9 percent to 1,246 yen after Deutsche Bank downgraded its rating on Japan's top brewer to "Hold" from "Buy," citing risks of shortfall in Asahi's earnings guidance this year. But Sumitomo Metal Mining rose to 994 yen to become the top positive contributor to the Nikkei 225.

Toshiba Corp climbed 2.3 percent to 262 yen after saying on Tuesday that it, Tokyo Electric Power Co and the Japan Bank for International Cooperation will together buy C$270 million ($221.1 million) worth of shares in Canada's Uranium One Inc.

Trade was light on the Tokyo exchange's first section, with 1.9 billion shares changing hands, compared with last week's daily average of 2.1 billion. Declining stocks outpaced advancing ones by more than 3 to 1.

PRECIOUS-Gold rises on haven buying, hits sterling high

Gold climbed in Europe on Thursday, building on gains that took it to a 6-1/2 month high in the previous session, as risk aversion fuelled investor demand for bullion and gold-backed exchange traded funds.

Gold priced in sterling and gold futures in India hit an all-time high, adding to record peaks recorded for bullion on Wednesday in euro, Canadian dollar and Swiss franc terms.

Spot gold was quoted at $942.60/944.60 an ounce at 1249 GMT, up from $938.35 an ounce late in New York on Wednesday. The metal hit a peak of $953.30 that day, its highest since July 2008.

"Gold is still in a very bullish trend," said Alexander Zumpfe, precious metals trader at Heraeus. "There is very strong investor demand, which you see when you look at the data coming from the ETFs, which are at record levels."

The world's largest gold-backed ETF, New York's SPDR Gold Trust, said its holdings rose nearly 5 percent on Wednesday. Gold prices rallied soon after the opening of the New York market, suggesting heavy buying.

ETFs and physical gold products such as coins and bars have proved popular with investors as the global slowdown shows little sign of abating.

The U.S. Congress is poised to pass as early as Thursday a $789 billion package of measures to stimulate the economy, which is reeling from a slump in asset prices, scarce credit and millions of layoffs. "The final passage of the stimulus, if it were to alleviate some investor uncertainty, could provide a headwind to the gold rally," said HSBC analyst James Steel.

Elsewhere the first fall in Japan's wholesale prices in five years showed the country may be entering a period of deflation, while Australia said its unemployment rate rose to a two-year high and South Korea's central bank slashed interest rates.

European shares slipped 1.5 percent on Thursday as fresh signs of deepening economic misery overshadowed the potential U.S. deal, weighed down by banks. Rising risk aversion benefited the dollar, however, as investors bought into the perceived safety of the currency as stocks fell.

Usually a stronger dollar weighs on gold, which is often bought as a currency hedge. However, the two assets have broken their historic relationship as both become attractive as a haven from risk. "Gold is still decoupled from movements in the currency markets, which means at the moment it has a life of its own," said Heraeus' Zumpfe.

Oil prices meanwhile were little changed just below $36 a barrel as fears over demand weighed. In supply news, South Africa said its gold output fell 17.6 percent year-on-year in December. The republic is the world's second largest producer of gold after China.

The IMF also told Reuters it had no intention of changing plans to sell 403 tonnes of gold once it has received Congressional approval to do so.

Among other precious metals, spot silver was quoted at $13.39/13.47 an ounce, against $13.49. Holdings of the largest silver-backed ETF, the iShares Silver Trust are currently at an all-time high of nearly 7,607 tonnes.

Spot platinum was at $1,076/1,084 an ounce against $1,067, while spot palladium was at $213.50/217.50 an ounce against $212.