World Stock Markets in Confusion

Nearly £50bn was wiped off the value of Britain's 100 biggest companies on a day of global stock market mayhem triggered by a deepening of the Euro zone crisis and fears for the US economy.

After a day of massive stock market falls in Europe and the US of a kind not seen since the depths of the last economic downturn, traders said the atmosphere was reminiscent of the banking crisis of October 2008. Wall Street endured one of its worst days since the height of that crisis, with the Dow Jones Industrial Index closing more than 500 points or 4.3% lower at 11,383 in heavy volume, as it resumed a two-week streak interrupted only briefly on Wednesday. It was the biggest single-day loss since 2008.

"For many traders this week has felt like the start of the banking crisis in 2008, which would go some way to explaining the panic selling we have seen today," said Will Hedden, sales trader at IG Index.

The fall on Wall Street is expected to cause further falls in the FTSE 100 index of leading shares on Friday, after the index fell to its lowest close, 5393.14, since September 2010 yesterday. The futures market was predicting a further 100 point fall.

Rumours were swirling around the City that hedge funds were being forced to sell assets such as gold in order to cover deepening losses on other investments. This led to a surprise 1% drop in gold, which in recent weeks had hit record highs of more than £1,000 an ounce as a safe haven bet in the eurozone and US debt crisis. Brent crude fell 5% to $107 a barrel amid signs of slowdown in the west's economies.

Anxiety over the debt crisis in the eurozone, and increasingly in Italy, set the tone for nervous trading during the London morning, but the pace of the decline accelerated as Wall Street opened sharply lower. By early afternoon in New York the Dow Jones had declined by 400 points.

Despite this week's 11th-hour agreement to raise the US debt ceiling, Wall Street is increasingly anxious over the health of the world's biggest economy. A major test comes on Friday with the release of US employment data giving the latest health check of an economy which barely grew in the first half of the year.

The 191.27 point drop in FTSE 100 index represented a 3.43% slump – the index's biggest daily fall in percentage terms, and the biggest points fall, since March 2009.

Banks were particularly hard hit, with falls in the bailed-out Lloyds Banking Group and Royal Bank of Scotland leaving taxpayers nursing £28bn of losses. There were big falls by other FTSE 100 firms.

The index of leading shares has now shed 422 points this week, wiping £110bn off its value. It is down 11% since April's peak. The continued weakness in the UK economy ensured the Bank of England kept interest rates at their record low of 0.5% for the 29th successive month.

The president of the European commission, José Manuel Barroso, fuelled anxiety about the eurozone debt crisis by berating European leaders about the speed at which they were responding to the debt crisis, barely a fortnight after congratulating them about their latest deal to rescue Greece.

"We are no longer managing a crisis just in the euro area periphery," he said. "Euro area financial stability must be safeguarded." He urged European leaders to review "all elements" of the €440bn (£382bn) European financial stability facility and its €500bn replacement, the European stability mechanism.

The European Central Bank gave signals it was ready to resume buying bonds of troubled eurozone countries. Dealers said the central bank had been buying Portuguese and Irish bonds – but not those of Italy and Spain, where borrowing costs have shot to euro era highs and are now the new focus of the markets.

Jamie Dannhauser, economist at Lombard Street Explore, said the ECB was "still in cloud cuckoo land".

"The overriding impression one gets of the ECB is of an organization unwilling to accept the reality that faces the Euro zone. In contrast to other major central banks, the ECB has recently been making hawkish noises – at least, that is, until now."

Despite the ECB interference, continental European markets suffered heavy losses. Germany's Dax closed 3.5% lower and the French CAC dropped 4%, while the euro fell sharply against other currencies, losing nearly 1.5 cents against the US dollar, to $1.4170.

The Bank of Japan had sparked frenzied action on the foreign exchanges after intervening to drive down the value of the yen, which has been strong against the dollar.

Bond yields – interest rates – in Italy remained stuck above the critical level of 6% while Italian shares plunged amid confusion about the moves in the main stock market index which was experiencing pricing difficulties.

Amid the rout, it emerged that police acting on orders from the prosecutors of Trani, a port on Italy's Adriatic coast, had raided the Milan offices of the rating agencies, Moody's and Standard & Poor's, as part of continuing investigations into their role in recent financial turmoil. The chief prosecutor in Trani told Reuters that his office was checking to see whether the ratings agencies "respect regulations".