Billionaire investor George Soros has warned that bailing out banks could turn them into "zombies" that suck the lifeblood of the American economy, which he predicted is in for a "lasting slowdown".
He also cautioned that the recent rise in global stockmarkets is a "bear market rally because we have not yet turned the economy around".
His gloomy verdict weighed on Asian stockmarkets today, alongside a report that the International Monetary Fund now estimates that the toxic debts racked up by banks and insurers could spiral to $4tn (£2.7tn).
Tokyo's Nikkei index edged down 0.3% to 8832.85 while Hong Kong's Hang Seng fell 1.1% and Singapore's Straits Times index was down 2.1%. However, the FTSE 100 index in London rose 33 points to 4027.15 in early trading.
Soros said he does not expect the US economy to recover until next year at the earliest.
"The recovery will look like an inverted square root sign," he said. "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shaped recovery or anything like that. You settle down, step down."
His comments last night came after Morgan Stanley warned the bear market was not over. Its much followed strategy team led by Teun Draaisma moved its recommendation on equities from neutral to underweight.
The team said in a note yesterday: ""We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."
Soros stressed that restoring health to the "basically insolvent" banking system and the housing market is key to any recovery. The public-private investment funds introduced to rid US banks of bad debts will work but won't be enough to recapitalise the banks so they can start lending again, he said.
"What we have created now is a situation where the banks will be able to earn their way out of a hole but by doing that, they are going to weigh on the economy," Soros said. "Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."
Analysts agreed that the financial system remains a problem and thought recent optimism that the worst may be over was overdone.
"The market's stance on banks had been too optimistic recently," said Nagayuki Yamagishi, a strategist at Mitsubishi Securities in Tokyo. "Some large US banks have already passed stress tests, but others haven't, and given that results are coming up soon, this simply reignited investor uncertainty."