Chancellor weighs in after another day of turmoil in world stock markets

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Gordon Brown yesterday moved to calm fears among investors as London's leading share index dipped below the psychologically-important 5,000 mark for the first time since the 1998 Russian financial crisis.

Amid another frenetic day on stock markets across the world, the FTSE 100 fell as low as 4,896 before recovering to end the day at a fresh three-year closing low of 5,034.

In London, the Chancellor said falls in share prices over the past few days had to be put in context of the recent strong performance on the market.

"If you look at the stock market over the last four years, there has been a big rise on the stock exchange," he told ITN.

In a separate interview, he appeared to hint he wanted to see interest rates fall further, praising the Bank of England for acting quickly so far this year.

"We are operating in a low inflation environment and given the difficulties we face around the world we are doing what we can and we are better placed than we have been in the past," he told Sky News.

A warning from the US administration that further falls on world stock markets could hit consumer confidence compounded the nervous mood.

"Further declines in the stock market might impair consumer confidence," said White House economic adviser Glenn Hubbard.

The London market plunged immediately after opening, reflecting a nervous mood built up over the weekend following falls of more than 2 per cent in London, New York, Paris and Frankfurt on Friday.

There was a glimmer of hope of an end to the carnage from New York where stocks rallied after recession fears triggered another early sell-off. The rebound came in time to boost the London market.

"I am a bit concerned about the recovery, with the fear being for some time that US investors are still in denial about how bad conditions are," said Jeremy Batstone, of NatWest Stockbrokers. "The concern is...how strong any rebound will be."

Justin Urquhart-Stewart, of investment group 7im, said: "I don't think there will be a crash but I think it will take a long time to get back to the levels we have seen."

Analysts believe the market could fall further. Neil Irving, technical analyst at online consultancy 4cast, said the next support level of 4,879 was under threat. "Since the risk is of another two weeks of decline before a decent low-point is reached, 4,600 and 4,400 are reasonable targets."

Stocks were also undermined by news manufacturers were forced to cut their prices last month.

Official figures showed prices of goods leaving the factory gate fell 0.1 per cent in August to leave annual inflation at just 0.3 per cent. In contrast, the cost of raw materials has risen 2.3 per cent over the past 12 months.

Simon Rubinsohn, chief economist at stockbrokers Gerrard, said profit margins were under severe pressure. "In that environment, investment inventories and employment within the manufacturing sector are likely to continue to fall," he said.

A series of weak economic data have sparked hopes the BoE, European Central Reserve and Federal Reserve will all cut rates next month.

Deutsche Bank yesterday cut its forecasts for the trough in UK rates to 4.5 from 5 per cent.