London shares plunge to three-year low

The FTSE 100 Index today fell to its lowest level for three years, with HBOS again the biggest loser, as the global fall-out from Lehman Brothers' collapse continued to reverberate.

The Footsie dipped below the 5,000 mark for the first time since June 2005 with London's biggest stocks taking a new pounding. Although it recovered to close at 5023.10, that was a 181.10 fall on the day - down 3.8 per cent on top of a similar fall yesterday. This contrasts with highs of 6,300 in May and 6,700 last October.

The global markets slump started today in Tokyo and Hong Kong.

But the New York market held up despite growing concerns about the future of AIG, one of the world's biggest insurers.

Back in London, shares in the Halifax Bank of Scotland had again slumped after a rise in funding costs prompted a second day of heavy falls. Britain's biggest mortgage lender's stock was down 33 per cent at one point, making it by far the worst blue chip share performer of the UK session. It recovered to close just 22 per cent down to 182 - but this compares with a 12-month high of 980 last October.

Analysts have said HBOS needs to refinance more than £100 billion of funding during the coming months, something which could be more challenging after the blow to banking confidence from Lehman's demise. Inter-bank lending rates also increased today, making funding more expensive.

HBOS has said it is "very confident" about its funding position, adding that it has £258 billion of retail deposits. A spokesman said: "We continue to access the wholesale markets whenever we choose to do so."

He said: "We are the country's largest savings institution and therefore have more retail deposits than any other UK bank.

"The credit crunch has been going on for over a year, and during that period we have demonstrated the sheer resilience of our funding franchise."

Other banks have also been on the receiving end of some severe punishment during the Lehman Brothers-inspired turmoil, with HBOS' rivals Barclays and Royal Bank of Scotland (RBS) also posting double digit percentage falls since markets opened yesterday.

The Bank of England reacted to the money market turmoil by injecting £20 billion into the financial system, on top of the £5 billion pumped in yesterday.

Today's liquidity boost - almost three times oversubscribed by banks scrambling for the funds - was echoed by the European Central Bank, which also pumped in cash for the second successive day.

Further fears over US insurance giant AIG also shook confidence among investors, with US markets expected to fall further after their biggest fall since the 9/11 terror attacks in 2001 yesterday.

AIG - massively exposed to the plunging US housing market - was granted a 20 billion US dollar (£11.2 billion) lifeline to shore up its finances last night.

But the giant, which sponsors Premiership champions Manchester United, has been downgraded by three major ratings agencies, making it more expensive for the firm to raise funds.

In the first six months of 2008, AIG made a net loss of 13.2 billion US dollars (£7.4 billion).

The concerns over the insurer came as money markets froze over in the wake of the Lehman collapse, with banks fearful of losses hiking lending rates.

The rate at which banks lend to each other for three months jumped to 5.791% today, up from 5.715% yesterday - the biggest one-day move since the bail-out of investment bank Bear Stearns rocked markets in mid-March.