The FTSE 100 index closed 190.4 points down at 5,477, one of its worst points falls ever, having at one stage fallen by more than 212 points. On Wall Street, the Dow Jones was trading more than 240 points off at midday, but clawed back to close down 78 points at 8,534. Bonds rallied sharply, with yields slumping to record lows on Wall Street as investors sought the safe haven of the US Treasury market.
US banks like JP Morgan, Citicorp and Chase Manhattan, which have big positions in emerging market debt, were among the biggest fallers in a day of panic trading. Credit Suisse, the Swiss banking parent of Credit Suisse First Boston also fell sharply in Zurich, on deepening fears that it is facing a huge loss from the Russian crisis.
The biggest casualties in a day of frantic trading were currencies and local debt markets in Asia, Latin America and Eastern Europe. These were collapsing as investors took the cue from the latest Russian upheaval to bail out of emerging markets in force.
Yesterday, the Turkish authorities were intervening to support the lira, the South African rand was under pressure, and in Latin America the currencies of Mexico, Argentina and Brazil suffered big falls against the US dollar amid signs that the Venezuelan bolivar was about to go. Stock markets in Latin America saw falls of between 6 and 8 per cent.
Dealers said that this week's Russian crisis had brought home to investors that the governments of the big industrial nations have run out of patience with investors. The International Monetary Fund has little more than $10bn in the kitty after shelling out some $40bn (pounds 25bn) to fund rescues in Korea, Indonesia and Thailand in the past year.
"The IMF and the G7 have called a halt to easy bail-outs. The new international strategy is to play hardball," said Paul Horne, European equity markets economist at Salomon Smith Barney, the US investment bank.
Germany, which was under a cloud because of its banks' relatively high exposure to Russia, saw its stock market index, the DAX, fall by more than 4 per cent. A meeting between representatives of the big Russian banks and the Russian authorities failed to provide much in the way of reassurance.
"The appetite for risk in the world has gone to an all-time low," said Stuart Brown, head of emerging market research at Paribas, the French bank. "People are saying - we don't know where or when the next shock is going to come from: China? Hong Kong? more in Russia? Latin America? - let's get out together."
Dealers said the worries about emerging markets had hit already fragile markets hard because of the spate of profits warnings by big US companies hit by the Asian crisis. Nervousness about the US political backdrop, with the Monica Lewinsky affair still eating away at the confidence in US President Bill Clinton and fears of a backlash in the wake of Thursday's bombing of Islamic terrorist targets in Afghanistan and Sudan, did not help.
The pound, by contrast, had a good day in the exchanges as domestic worries took a back seat to concerns about far more serious problems elsewhere.
Sterling soared a pfennig and a half to DM2.942 and was nearly a cent higher at $1.6357. The yen weakened sharply despite rumours that the Bank of Japan was preparing to intervene in the markets, trading at 145 compared with 143 on Thursday.
Who's next? Page 19