By Kevin Plumberg

The South Korean won dropped 5.7 percent to the lowest in more than 7 years against the U.S. dollar as investors focused on the country's relatively high level of debts, despite assurances from the government that Asia's fourth-largest economy was not facing a currency crisis.

The $700 billion U.S. rescue fund, ad hoc measures by European governments and massive injections of funds by central banks around the world have not been able to stop confidence in the financial system from evaporating or growing fears the global economy is on path to recession.

On Monday, the Dow Jones industrial average closed at a 4-year low after dipping below 10,000 points for the first time since October 2004.

The fury with which global equity markets have sold off in recent weeks and the worsening condition of the financial system has made the upcoming Group of Seven rich nations meeting even more important. Investors have begun to anticipate some kind of cooperation among countries to solve the morasse.

"The key issue is coordination of policies, since individual country policies aimed at shoring up confidence of domestic institutions can actually exacerbate systemic risk by altering relative risk between countries," said Ashley Davies, currency strategist with UBS in Singapore. "As such, a coordinated global approach by the major financial powers may be critical to containing the destructive aspects of global deleveraging," he said in a note.

The Nikkei was down 2.8 percent after earlier slipping to its lowest since December 2003. Shares of high-profile exporters Canon Inc and Honda Motor Co were among the biggest drags on the index.

Australia's benchmark S&P/ASX 200 index slid 2.1 percent to a 3-year low.

South Korea's KOSPI was down 0.9 percent after closing at the lowest in 21 months on Monday.

The country's regulator said it was considering steps to reduce volatility in the equity market, helping to stem some of the day's losses.

The MSCI All-Country world stocks index closed at a four-year low on Monday, having dropped by a third so far this year.

In other markets, dealers picked up the pieces a day after the Chicago Board Options Exchange Volatility index, better known as the VIX, vaulted to a record high of 58.24 as investors scrambled to buy protection against plummeting global stock markets.

"At this point, all we can do is to wait and see how effective the U.S. financial rescue plan or any other coordinated government efforts will be in thawing global capital markets," said Lee Kyoung-su, a market analyst at Taurus Investment & Securities in Seoul.

The benchmark 10-year U.S. Treasury note yield, which moves in the opposite direction of the price, ticked up to 3.49 percent after dropping to 3.46 percent late on Monday in New York. It was still down sharply from 3.60 percent late last week, reflecting the heavy demand for government debt as a relatively safe haven from market shockwaves.

Japanese 10-year government bond futures were down 0.6 point to 137.90 after rising for three straight days.

Frozen interbank lending markets and bank rescues remained a feature in the United States and Europe. But the bailout of two big European banks and a decision by several European governments to guarantee bank deposits in emergency moves in the last several days have done little to dispel intense waves of fear among investors.

After a massive surge on Monday, the yen edged up against the dollar and the euro but slipped against higher-yielding currencies such as the Australian and New Zealand dollars.

The dollar dipped 0.4 percent against the Japanese currency to 101.44 yen, edging toward a six-month low of 100.22 yen hit on trading platform EBS the previous day.

The European single currency edged up 0.2 percent to $1.3531. The euro struck a 13-month low below $1.3450 on Monday, hit hard by a decision by leaders of Europe's four biggest economies against a coordinated bailout plan.

The euro slipped 0.2 percent to 137.24 yen.

Gold climbed in the spot market, up 0.7 percent to $863.50 an ounce after rocketing nearly 4 percent on Monday on a flight to anything resembling safety.

(Additional reporting by Park Jung-young in SEOUL; Editing by Lincoln Feast)