This sent the Dow Jones index tumbling 132 points within minutes, with traders caught on the hop by the accidental leak. Many now fear the Federal Reserve will have to raise interest rates again in early October.
The FTSE 100 index had earlier ended 128.8 points lower at 6,246.4, its lowest for the day. And Tokyo's Nikkei index had fallen 2.69 per cent to end at 17,436.56 yesterday.
"The news about US inflation pressures has really unnerved the markets. We are in for a volatile time," said Nick Stamenkovic, an analyst at IDEAglobal.com.
The jobs and earnings report for August, due on Friday, will be the next focus of market attention. Wage pressures in the US have begun to build up in recent months, signalling inflation in the pipeline.
Fears that Wall Street is poised for a big correction also sent the dollar tumbling to new lows against the yen on the foreign exchanges yesterday. A sharp fall in US asset prices will send the dollar tumbling, analysts said.
Fears that the Bank of Japan might intervene to cap its rise ahead of this month's meeting of Group of Seven finance ministers could not prevent the Japanese currency climbing above 110 to the dollar, jumping nearly 2 per cent to its highest for seven months.
G7 deputy ministers gathering in Berlin to plan the Washington meeting in three weeks' time, discussed the dramatic currency moves. Caio Koch- Weser, Germany's deputy finance minister, said exchange rates had been discussed as part of the routine assessment of the world economy, but would not be drawn on details.
A spokesman for Japan's prime minister said Haruhiko Kuroda, Japan's vice-finance minister, had asked for joint G7 intervention to stabilise the yen.
The Japanese concern is that an overly strong currency will derail the fledgling economic recovery. However, the market's determination to drive the yen higher has forced the Japanese government to accept that its earlier currency target of 115-120 to the dollar is now unattainable.
"There is a clear trend towards further yen strength, and the only thing that will change that trend is some form of co-ordinated intervention, said Keith Edmonds at IBJ International. Other analysts were sceptical about the chances of G7 agreement this month. Gerard Lyons of Standard Chartered said: "In the past, intervention has only been successful when the big players' interests are the same. But at the moment the Japanese want to see the dollar stronger, the Europeans want to see it weaker and the Americans don't seem to care."
Both the yen and euro would gain from a big fall in US share prices, with economists convinced that recovery is in sight in Japan and well under way in Euroland.
The euro now looks safely past the danger of falling to parity with the dollar. New figures from France showed a further decline in unemployment in July, the headline total down 53,000 to 2.77 million. Manufacturing output jumped 0.9 per cent in June, reaching a level 0.7 per cent higher than a year earlier.
By contrast, US growth is expected to slow as the Fed applies the brakes. Separate figures yesterday showed US consumer confidence falling for the second month running, with consumers growing increasingly concerned about the prospect of further interest rate rises. However, confidence remains close to 30-year highs, the index having climbed in each of the previous eight months.
The yen touched a seven-month high of 109.05 to the dollar yesterday, up from its previous New York close of 110.63, before pulling back slightly. The euro climbed to $1.0568 from $1.0482.Reuse content