LONDON (AFP) - World stock markets slumped Wednesday, with losses of five percent in London and Hong Kong and a near three-percent drop on Wall Street, as a rally lost momentum amid growing fears of a global recession. US stocks tumbled after heavy losses across Europe and on most Asian indices, as weak US economic data reminded investors of a likely recession stemming from the credit crisis despite extraordinary rescue measures. Investors worldwide took profits a day after Washington said it would inject up to 250 billion dollars into ailing banks to help end the worst financial crisis since the 1930s. "There can be no doubt now that the (US) economy is in recession," said High Frequency Economics analyst Ian Shepherdson after news that US retail sales had slumped by 1.2 percent in September. The drop in sales was the steepest since August 2005 and weaker than market expectations for a 0.7-percent decline. In late European trade, London was down 5.25 percent, Frankfurt lost 4.72 percent and Paris was down by 4.23. Hong Kong closed down 5.0 percent, Seoul slid 2.0 percent and Sydney ended 0.9 percent lower. Tokyo ended up 1.06 percent, building on Tuesday's record 14 percent surge. "After the early burst of euphoria on stock markets over the rescue packages launched worldwide... the dust slowly seems to be settling and the last few days' roller coaster (higher) is being followed by a kind of morning-after sentiment," said Commerzbank analyst Antje Praefcke. On Wall Street, the Dow Jones Industrial Average slid 2.73 percent in early deals. A top US central banker had Tuesday said that the United States "appears to be in a recession." There are also growing fears Japan and Europe are heading for a spell of economic stagnation or recession. The German economy is heading for a slowdown, but the downturn will not be a long-lasting one, Chancellor Angela Merkel said Wednesday. "We had a couple of good days (on stock markets) and it's not surprising to see some profit-taking," said Nomura Australia markets strategist Eric Betts. Nine big banks including Citigroup, JPMorgan Chase and Goldman Sachs agreed to give the US government equity stakes in exchange for new capital, under the first programme of its kind in the United States since the Great Depression, officials said. On Monday, the Dow had registered its biggest points rise in history and its biggest rally in percentage terms since 1933 as markets around the world reacted to government intervention to tackle the financial crisis. "All the good news has now come out," said Masatoshi Sato, a broker at Mizuho Investors Securities. "Attention has now shifted to the real economy." The Saudi stock market, the largest in the Middle East, closed up by 0.5 percent on Wednesday after recovering losses that saw it open 7.8 percent down after two days of impressive gains. Janet Yellen, the head of the San Francisco branch of the Federal Reserve, said the US economy appeared to already be in a recession, which is usually defined as at least two quarters of economic contraction. "By now, virtually every major sector of the economy has been hit by the financial shock," she said in an address in Palo Alto, California. Markets across the globe have been extremely jittery since the middle of last month when Wall Street investment bank Lehman Brothers filed for bankruptcy after the US government refused to bail it out. While panic selling on global markets has subsided for now, there are still deep concerns about the outlook for the US and global economies. "The US government's bailout plan is not going to get the economy back on its feet anytime soon," warned analysts at investment bank Calyon. "Markets will increasingly brace for a long and deep recession in the US and a recession to varying degrees globally." After pumping emergency funds into the financial system for 19 straight business days, Japan's central bank drained excess cash from the Tokyo money market Wednesday as credit market tensions eased.