UPDATE: Stocks drop in early trading

Wall Street joined world stock markets in a precipitous plunge today, with the Dow Jones industrials dropping more than 400 points in the opening minutes of trading. The growing belief that the world will suffer a punishing economic recession has investors furiously dumping stocks.

The massive decline was caused by increasingly grim news from overseas. In Japan, shares of Sony sank more than 14 percent after it slashed its earnings forecast for the fiscal year. In Germany, Daimler’s stock dropped 11.4 percent in morning trading after it reported lower third-quarter earnings and abandoned its 2008 profit and revenue guidance.

Japan‘s Nikkei stock average fell a staggering 9.60 percent. In Europe, Germany’s benchmark DAX index was down 10.76 percent, France’s CAC40 dropped 10 percent while Britain’s FTSE 100 sank 8.67 percent after the government said its gross domestic product fell 0.5 percent in the third quarter, putting the country on the brink of recession.

The dour outlook convinced investors that the world economy is headed for a long and severe downturn despite a raft of government rescue efforts aimed at pulling the financial system from the brink. It also indicated that the tremors caused by the global credit crisis may have only begun to be felt in their true scope and magnitude.

“There’s a lot of panic out there today,” said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York. “People have been saying that we’re in a recession. This is the realization.”

Fearing more carnage in world equity markets, big hedge funds and other institutional investors have been pulling out their money en masse in a bid to reduce risk and raise cash – a process known as deleveraging that only intensifies the selling. Meanwhile, individual investors that have seen their holdings decimated in recent weeks have been yanking money out of mutual funds, adding to the downward pressure on markets.

“I think it would be natural to make an assumption that there are some funds in trouble and that we may see some funds shut down,” Fullman said.

In the first minutes of trading, the Dow fell 417.67, or 4.81 percent, to 8,273.58.

Broader stock indicators also fell. The S&P 500 index fell 50.26, or 5.53 percent, to 857.85, and the Nasdaq composite index fell 86.75, or 5.41 percent, to 1,517.16.