Almost £25bn was wiped off the value of Britain's premier stocks yesterday as fresh concerns over rising interest rates and inflation triggered a sell-off across the globe.
The FTSE 100 closed down 101 points, or 1.8 per cent, at 5,519.6, its lowest level since December. Shares across Asia and Europe fell before the publication of key US inflation figures later today.
The rout began on Monday night in New York, where the technology-rich Nasdaq dropped 3 per cent. It quickly spread round the world.
In Japan, the Nikkei plunged more than 4 per cent to finish at its lowest point in seven months. It lost 614 points to close at 14,218.6, the largest single-day fall since 11 September 2001.
The sell-off was led by foreign investors in the Tokyo Stock Exchange who dumped almost 30 million shares. Flagship companies such as Sharp, Sony and Toyota, which depend heavily on the North American market, were particularly badly hit.
Investors fear the US Federal Reserve will further raise interest rates, choking the economy and shrinking the market for Japanese electronics and cars.
A number of Fed officials, including the chairman, Ben Bernanke, have expressed discomfort with prospects for inflation, convincing investors the Fed will lift rates for the 17th time to 5.25 per cent at its policymaking meeting on 29 June.
The Japanese sell-off picked up speed after Toshihiko Fukui, the governor of the Bank of Japan, said he had contributed millions of yen to a fund run by Yoshiaki Murakami who has been accused of pocketing more than ¥3bn (£15m) in an insider trading scam.
"I got together with several like-minded people in [autumn] 1999 and we contributed ¥10meach to help Murakami realise his dream," he told Japanese MPs.
Mr Murakami, a former trade ministry bureaucrat, who operated his fund mainly out of Singapore, is under arrest in Tokyo.
The fallout has highlighted the risks of allowing a new breed of flamboyant, independent businessmen to modernise Japan's once musty share markets.
As the rout moved west, emerging markets were the biggest casualties. India's shares slumped 4 per cent while Russia's MCX bourse suspended trade after falls of more than 8.5 per cent. Turkey's central bank had to intervene to boost the lira.
Volatility dominated trading in the US market, with the Dow rising almost 70 points in early trade as bargain hunters piled in. But caution won out, and the US blue-chip gauge ended down 86 at 10,706.14.
Rodrigo Rato, the head of the International Monetary Fund, moved to calm nerves yesterday by saying he did not expect a "dramatic correction" in asset prices. "We're still in a very broad-based expansion in the world."Reuse content