The 1990s have seen private American investors embrace the US stock market with gusto, often borrowing heavily to accumulate extra shares. But Alan Greenspan, chairman of the Federal Reserve Board, the US central bank, has expressed concern that a market sell-off could prompt a tidal wave of profit-taking by America's army of retail investors. In particular, US private investors have been rattled by the sharp decline in the prices of internet stocks.
Richard Jeffrey, group economist at CCF Charterhouse, said: "There is concern that once markets begin to fall, it will force more and more profit- taking. There may be some trading losses at banks, but in the US there is more concern about losses among the public."
Justin Urquhart-Stuart, corporate planning director at Barclays Stockbrokers, said the situation was potentially worse than the major correction that world markets suffered 12 months ago.
"There is a lot more nervousness in Middle America now than there was last year," he said. "Then there was a view that the US economy would be all right. But now we have already had a rise in US rates, and people are thinking that maybe we should take some profits."
Further falls on Wall Street, where the Dow Jones Industrial Average closed on Friday down 79.79 points at 10,714.03, could this week drive the UK's FT-SE 100 index of leading shares below 6,000. The FT-SE 100 ended last week at 6121.0, down almost 500 points from the all-time closing high it set last month.
The fall in equity markets has been accompanied by large declines in the value of UK and US government bonds. Various explanations have been forwarded for the markets' recent uncertainty. Fears that the US Federal Reserve will increase interest rates later this month for the second time this year have undermined confidence. The likelihood of a move increased on Friday when employment data showed that the US economy added an extra 310,000 jobs in July, a much higher figure than expected.
The Bank of England's Monetary Policy Committee last week decided to leave UK base rates unchanged at 5 per cent, but the City remains nervous ahead of this week's domestic data, which includes unemployment figures and the inflation report.
Mr Jeffrey said: "The market is being driven by uncertainty over the direction of interest rates in the US and the UK. There is a strong case for UK interest rates going up next month because the economy is just beginning to generate too much momentum."
On Friday, markets were awash with rumours that a major hedge fund was in trouble, mirroring events 12 months ago when Long Term Capital Management was brought to the brink of collapse.
Credit spreads, the difference between bond yields and interest rate swap rates, ballooned last week, reflecting concern that investment banks may have suffered large trading losses this summer. However, no major institution has so far admitted to any significant reversals during the last few weeks.
Interest rates have also been driven higher by a flood of bond issues as banks and corporates, fearful of problems associated with the end of the millennium, rush to borrow cash before the end of the century.
Michael Saunders, UK economist at Salomon Smith Barney, said: "People fear that liquidity will dry up later in the year."