A U.S. investment bank says that the U.S. and Europe are “dangerously close” to a new recession because of economic policy errors they have made.

Wall Street bank Morgan Stanley warned Thursday that the U.S. and the 27-nation European Union are hovering close to a recession within the next year, which it defined as economic contraction in two consecutive three-month periods.

The investment bank said European leaders have made a “slow and inefficient response” to the continent's debt contagion, and that the recent political drama in the U.S. over raising the country's borrowing limit has eroded business and consumer confidence. Morgan Stanley cut its prediction for the growth of the U.S. economy this year from 4.2 percent to 3.9 percent, and said the economy's advance would also be curtailed in 2012.

With the Morgan Stanley warning, weak U.S. economic reports and continued worries about the debts of European governments, European and U.S. stock markets plunged on Thursday. Major European markets closed with losses of 4.5 percent to nearly 6 percent, with U.S. stock indexes dropping sharply in afternoon trading.

Both Europe and the U.S. endured recessions in 2008 and much of 2009, before their economies again started to advance modestly. But since then, the debt-laden governments of Greece, Ireland and Portugal have all had to secure international bailouts to continue to finance their government operations and adopt austerity budgets with spending cuts and higher taxes. In the U.S., about 14 million workers remain unemployed and banks have foreclosed on millions of homes whose buyers have been unable to repay their loans after they lost their jobs.

U.S. President Barack Obama said Wednesday that he does not think his country will slide into another recession. But he said the U.S. is in danger of not having a fast enough recovery to deal with “a genuine unemployment crisis.”

EU President Herman Van Rompuy said Thursday that he does not foresee a European recession even though the continent is facing weak economic growth and large public debts.