Small-cap stocks remained sharply lower into midday, unable for a third consecutive day to sustain a morning rally in positive territory as fears of an economic recession and frozen credit lines spark investor flight from equities into cash. At 12:33 p.m. ET, the Russell 2000 (NYSE:IWM) was down 20.23, or 4.05%, at 478.97, up modestly from the morning low, which marked the lowest point since August 2003.

The Russell actually was up more than 1% briefly this morning, and the Dow turned into positive territory generating a big roar of approval on trading floors in New York and Chicago, but the rally died off quickly, especially after a speech by President Bush failed to inspire confidence among investors that the worst of the storm has been weathered.

At the time Bush started speaking, small caps were off about 1.2% and the Dow was down about 80 points; the President made a surprisingly quick prepared remark, took no questions, and the market started falling hard … within an hour after his appearance the Dow was down more than 350 points and small caps were off 4%.

Today’s extension of the downside rout in stocks came on the heels of steep declines in stock markets around the world overnight as the credit contagion spreads to the banking systems of countries in every corner of the planet. Far-flung posts such as Iceland and Indonesia halted trading on stock markets overnight, a move also seen in Russia, Romania and Ukraine.

The distrust of equity markets has also spread into other asset classes, with Treasury markets sinking at the same time that commodity prices are tanking. Crude oil prices were down some 8% this morning, slipping below $80 a barrel for the first time in a year. Even meat prices were hit hard; after rising to multi-year highs a few months ago, cattle and hog prices were tumbling on fears that meat consumption . . .

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