Reports suggest mortgage giants Freddie and Fannie will be unable to avoid a bailout [AFP]

The markerts plummeted on Tuesday, following an article in Barron's, a US financial weekly, that said a government bailout could wipe out existing holders of the two companies' common stock and badly affect other asset holders.

Asian investors are already anxious about lower corporate earnings and slowing economic growth and the report gave them another reason to keep out of the market.

Lorraine Tan, director of equity research at Standard & Poor's in Singapore, said: "People are expecting the worst, so it’s a reason to stay on the sidelines for now."

The report in Barron's rattled investors and on Wall Street, shares in the two mortgage giants fell to their lowest in nearly 20 years.

The news appeared to confounded those expecting a US recovery, at a time when the euro zone and Japanese economies are shrinking and could be lumbering toward recession.

Markets down

Tokyo's benchmark Nikkei 225 index sank 2.3 per cent to 12,865.05 and Hong Kong's blue-chip Hang Seng Index shed 2.1 per cent to 20,484.37.

"The Chinese stock market's steep losses since the Olympics [began] are also denting sentiment towards heavy industry such as steel makers and shipbuilders," said Won Jong-hyuck, a market analyst at SK Securities in Seoul.

"There are worries the Chinese economy may not grow as robustly after the Olympics."

In South Korea and Singapore, indices lost about 1.7 per cent each.

Japanese government bonds climbed as equity markets declined, boosted by gains in US Treasuries.

Japanese bonds continued to draw support from investors worries about domestic and global economies, underscoring the prevailing view that the Bank of Japan will keep interest rates steady.

Against the yen, the dollar was down 0.3 per cent at 109.82 yen slipping from last week's 7-month high above 110.50.

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