NEW YORK (Reuters) – A report of strong profits at Bank of America yesterday masked deeper credit problems, while first-quarter data from Russia and Germany showed the two economies remained deep in recession's grip.

Bank of America's shares tumbled 22 percent, dragging world stocks down, after it reported a big increase in troubled loans, even though its first-quarter profit more than doubled with help from its purchase of Merrill Lynch

The bank, which has received $45 billion from the US government, said it had set aside $13.38 billion for credit losses, up from the fourth quarter's $8.54 billion.

"We continue to face extremely difficult challenges, primarily from deteriorating credit quality driven by weakness in the economy and growing unemployment," Chief executive Kenneth Lewis said.

Bank of America's warning about credit quality, which raised questions about the sustainability of bank profits, drove markets sharply lower. Wall Street and European shares fell 3.5 percent, while Asian stocks held near a six-month high struck last week.

Germany's Bundesbank, which said the nation's recession had "intensified further" from a 2.1 percent contraction in the final three months of last year, did not counter a growing financial market view that late 2008 and early 2009 could mark the low point for the worst global downturn in 80 years.

That belief has propelled world stocks on a six-week rally, but most experts expect no real upturn until next year.

"If we are to see a sustained bout of buying, we need to see consistent positive economic newsflow, which simply can't be guaranteed," said Chris Hossain, senior sales manager at ODL Securities.

"Having endured 18 months of pain, it will take more than some OK banking numbers to get the masses to return to the markets."

Russian data showed about 1.8 million workers lost their jobs in the first quarter, taking the jobless rate to an eight-year high.

Retail sales, real wages and capital investment all fell more sharply than expected in March, suggesting Russia's first economic contraction in a decade was not near an end.

Cautious optimism about corporate earnings and data suggesting the free-fall in global trade and economic activity was slowing have spurred talk of "green shoots" of recovery and buoyed world stocks by nearly a third since early March.

But yesterday's reaction to Bank of America's results indicated there still are deep questions over the likelihood and strength of an economic recovery.

"People are starting to peel the results back and say, 'Wait a second,"' said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "'Can (the results) continue in the next quarter?"'

Oil prices slid almost nine percent to below $46 a barrel, depressed by a rising US dollar and caution about the pace of economic recovery and its effect on oil demand.

A survey released yesterday showed capital spending by US firms improving, while the pace of layoffs was slowing slightly.

But the Conference Board's US index of leading indicators dropped 0.3 percent in March, it said, more than the 0.2 percent economists expected, pointing to a continuing downturn.

US economist Nouriel Roubini said the surge in global equity markets in recent weeks is a false rally because more financial shocks are in store and the US economy is weak. "This is a bear market rally," said Roubini, a professor at New York University who had predicted much of the current crisis.

Policy-makers strove to temper optimism that the world economy has turned a corner.

Trillions of dollars committed to stimulus packages are starting to work, but governments may have to do more, the head of the OECD said.

Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development, told Reuters the world economy would not bottom out until next year and would probably start growing again only toward the end of 2010.

European Central Bank chief Jean-Claude Trichet struck a similar note, saying it was dangerous to read too much into recent data that raised hopes the global economy may already have bottomed.