Worst quarter since 2008 for European markets

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European shares have suffered their biggest quarterly fall since the collapse of Lehman Brothers, driven by fears over the eurozone debt crisis and by slowing global growth.

World stocks fell as the market put Thursday's brief respite behind it to end a tough third quarter on a grim note. The pan-European FTSEurofirst 300 index closed down 1.6 per cent at 918.44 and 17.3 per cent lower for the quarter. The drop was the worst since the final three months of 2008, when Lehman's bankruptcy triggered the worst recession since the 1930s.

Britain's FTSE 100 index had its worst quarterly drop since the third quarter of 2002, dropping by 13.7 per cent to 5,128.48 in the fourth-worst period on record and losing a total of £212bn in value.

Louise Cooper, at BGC Partners, said: "A perfect storm of appalling bad news – inadequate policy response, fears of a recession, and the intensification of the sovereign debt crisis – has driven prices lower."

The eurozone's woes worsened yesterday when figures revealed a jump in inflation to a three-year high last month. The unexpected rise to 3 per cent restricts the European Central Bank's room to cut interest rates as economic growth stalls.

European shares and the single currency were boosted on Thursday by Germany's approval of new powers for the eurozone bailout fund. However, data from yesterday showed German retail sales in August dropping at their fastest in more than four years.

Chinese manufacturing contracted in August for the third straight month, suggesting Asia's growth engine was slowing and the world economy was weakening sharply. Gold, a safe haven, rose more than 1 per cent and had its biggest quarterly gain this year.

Markets gyrated in September as traders veered between preparing for a Greek debt default and hoping that the eurozone's big powers would stave off disaster. The Chicago Board Options Exchange's Vix index, which measures volatility in equity markets, has surged as investors have rushed to protect investments.