In London, the FTSE 100 share index set the scene earlier, slumping 125.5 to 4,865.8 - its biggest one-day point fall since 1987 - driven by a retreat in the banking sector as investors turned their backs on high-flying blue chips.
The slump in New York pulled the Dow nearly 550 points back from its record high of 8,259.31 just seven sessions earlier.
Since then the roller-coaster market has dipped and risen on an overall downward trend, with the closing Dow figure changing direction three times.
The decline was due at least in part to computer-driven selling typical of "double witching" days such as Friday, when options contracts expire on stocks and stock indices. Investors were also shaken by an earnings warning from Gillette and a sharply stronger dollar.
Few dealers had an explanation for yesterday's dramatic decline on both sides of the Atlantic, after a week in which economic data in the UK and US were surprisingly benign.
Fears of interest rate rises in America were put on hold by figures showing consumer prices growing at their slowest rate for 11 years.
The FTSE 250 index of stocks falling just outside the market's 100 largest, rose yesterday by 8.3 points to 4,698.2 as investors focused on better prospects for the country's exporters following a fall in the value of the pound and comments this week from the Bank of England suggesting further weakness is likely.
Leading stocks were given a lead by Hong Kong's Hang Seng index, which fell 400 points to 16,096.9 after three-month lending rates in the former colony rose to 9 per cent, their highest since 1995. That hit HSBC, which has extensive shareholdings in the Hong Kong market, especially hard.
The volatility of the FTSE 100 index, which closed at 4,865.8 yesterday, is certain to open up the debate about how good a yardstick of UK investment sentiment it now is.
Its fortunes and those of the rest of the UK's more than 2,000 quoted companies have become increasingly divergent.
Despite an 18.1 per cent rise in the value of the FTSE 100 index since the beginning of the year, the FTSE 250 index has risen only 4.6 per cent.
Yesterday's movements confirmed the belief of an increasing number of investors that any remaining value in the stock market is in the second- liners and SmallCap constituents, which were also unfazed by the turmoil in the larger stocks.
Smaller stocks, which include many manufacturing companies dependent on overseas end-markets, have benefited from the recent depreciation in the pound, which traded yesterday at DM2.93, against a high last month of DM3.07.
Paper and plastics group Bunzl jumped 11.5p, or 5.1 per cent, to 238.5p. Other gainers included Williams, Rexam and Laird.
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