FTSE shares hit five-month low

World markets took another hammering today as Europe's debt crisis and worries that the US economy will slip back into recession spooked investors.

Weak economic data from the US sparked more fears about the world's biggest economy, while Spanish and Italian government borrowing costs escalated as financial markets fretted they would struggle to keep up with debt repayments.

In London, the FTSE 100 Index dropped 2.5% at one stage to its lowest point this year, with markets in France and Germany showing similar falls.

Meanwhile, the Dow Jones Industrial Average in the US fell 0.8%, putting it on course for its ninth day of falls in a row.

Figures released today showed that US services sector growth was weaker than expected in July, while factory orders fell. This followed yesterday's news that consumer spending showed its biggest fall for nearly two years.

Investors are concerned the pledge to find 2.4 trillion US dollars (£1.5 billion) of savings over the next decade will impact on US growth prospects and could lead to the country losing its cherished AAA credit rating.

Weaker Chinese services data also added to worries about the strength of the economic recovery.

Brent crude oil prices dropped 1.5% to 114 US dollars, while shares in energy and mining companies tanked amid the possibility that demand may fall.

Gold - seen as a safe haven investment - hit record highs of 1,674 US dollars an ounce, before settling at around 1,670 US dollars.

But the UK and the pound have also emerged as a so-called safe haven - territory normally reserved for the US dollar.

The yield on 10-year gilts, the benchmark UK Government bond, has fallen to a record low while sterling strengthened against the dollar - signalling confidence in the UK's financial position compared with other nations.

David Jones, chief market strategist at IG Index, said: "It is the now familiar double-whammy of sovereign debt and a stumbling recovery that has smashed sentiment once again today.

"Italian and Spanish yields have jumped in recent days, and for too many traders this looks like a replay of last year's Greece and Ireland troubles."