The FT-SE index of 100 leading London shares dived below 3,000 for the first time in more than a fortnight. It ended 51.8 points down on Friday's close at 2,971.1, cutting the value of London shares by pounds 12bn. At one stage the Footsie was 85 points lower.
Some economists drew ominous parallels with the crash of October 1987. Glenn Davies, of Credit Lyonnais Securities, said: 'You cannot justify what's going on in terms of the fundamentals. This is some sort of liquidity crunch and it is snowballing. We're now overshooting and it is starting to look unstoppable. The markets need a final blow-off.'
Stock markets in France, Germany, Belgium and Switzerland reached new lows for the year. Share prices in Frankfurt dropped 4 per cent in the biggest one-day decline since the 1991 coup attempt against Mikhail Gorbachev, the then Soviet president. But most European markets recovered ground during the afternoon as Wall Street stabilised.
The Nikkei Average in Tokyo had earlier fallen sharply, shedding more than 350 points to close at 21,152.03. Far Eastern traders had been worried by the fall in the dollar after Europe finished trading last week. The dollar closed 3 pfennigs below Friday's close in London at DM1.5995, while the pound gained 1.42 cents to dollars 1.5372.
Traders in Europe and later in New York were convinced some sort of co-ordinated intervention was imminent from world central banks, market strategists said later.
'The only thing holding the dollar up now is concern that we'll see concerted intervention,' Tom Hoge, vice-president of corporate trading at Bank of New York, said early in the US trading session.
The intervention never came, but the market - at least in New York - was later influenced by predictions from the former Federal Reserve governor Wayne Angell that the American central bank would instead raise US rates. Mr Angell, now chief economist at Wall Street's Bear Stearns, said the rise - the fifth this year - would come when the Fed's policy committee met on 5 July.
Economists disagreed on the reasons for the latest sell-off, with some pointing to disappointing predictions of the US government's budget deficit, which is expected to reach dollars 170bn this year and dollars 225bn in fiscal 1995.
Others challenged the explanation given for Friday's late sell-off in New York, which had been blamed on a prediction by an industry-group economist that the dollar could lose another 10 per cent of its value against the mark by the end of 1995.
The run on the dollar, with the implication that the threat of inflation is not over in the US, sent the US long bond down another half- point in early trading, and drove the Dow Jones Industrial Average down more than 30 points within minutes of the market opening. After gyrating wildly all day, the index closed 34.88 points lower at 3,741.90. The long bond recovered, only to plunge again later.
Bonds have been depressed by rapidly rising prices for commodities and raw materials - often seen as a harbinger of faster price increases on the high street. Commodities stabilised, but further rises are expected with industrial metals near three-year highs.
Gerard Lyons, of DKB International, said worries about inflation, interest rates and public borrowing were all damaging sentiment.
'Uncertainty is bound to continue until the US market stabilises.'
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