Markets dive as world economy reels from the financial crisis

FTSE 100 hits lowest level since Iraq war

World stock markets have suffered yet another day of dramatic sell-offs, with share prices in the UK plunging more than 5 per cent after a slew of dire economic reports and more turmoil in banking and financial services.

The FTSE 100 index fell 5.33 per cent to close at 3,626 last night, the lowest level since March 2003, when the UK was on the verge of war in Iraq. There were similar slumps across Europe, where share prices plunged by at least 3 per cent in markets including France, Germany and Spain.

The falls in Europe followed corrections across Asian stock markets, with the Japanese Nikkei declining by 3.8 per cent. There was no respite in America either, where the Dow Jones shed 299.6, or 4.2 per cent, to 6,763.3 – its first close below 7,000 since 1997. The S&P fell below 700 for the first time since October 1996, before closing down 4.7 per cent at 700.8.

Asia's sell-off was prompted by more disappointing economic news from China, which warned its manufacturing sector had declined further during January, and from Japan, which said it had suffered another sharp fall in car sales.

However, Western stock markets were also hit particularly hard by the announcement of HSBC's £12.5bn rights issue, which was unveiled in tandem with a bleak update from the bank's sub-prime lending business in the US.

The latest disastrous news from the American insurance giant AIG, which said it had lost $61.7bn (£43.9bn) in the final three months of last year alone, added to concerns that the shocks to the world's financial system may not yet be over.

Jane Coffey, head of equities at Royal London Asset Management, said that although HSBC's cash call had been expected, the scale of the fund raising had rocked the market, particularly in the current economic environment.

While the bank's rights issue is fully underwritten, it coincides with other cash calls announced by large UK companies, reducing the capital available to those still to announce their plans.

"When you get £12.5bn announced, it's quite a lot of money to find," Ms Coffey said. "With eastern Europe still looking in a horrible state and not getting support from the rest of Europe, that's another concern, that the economies are contracting quite aggressively."

Data published yesterday by both UK manufacturers and their counterparts in the eurozone showed production declined here and on the continent during February, which disappointed analysts because January's figures had shown a slight improvement.

This week's US economic data is unlikely to offer relief, with America still reeling from Friday's revision of the decline in fourth-quarter GDP, which was downgraded to 6.2 per cent. Analysts expect a record fall in US employment when the latest figures are announced on Friday.

John Mar, head of sales trading at Daiwa Securities, said: "You're seeing the US is sinking lower and lower and we're still desperately searching for a bottom; it's death by a thousand cuts."

The UK stock market is now around 330 points, or 10 per cent, above the low point reached in the run up to the invasion of Iraq six years ago this month. Were further declines to take the FTSE 100 through that level, share prices would return to levels not seen since 1996. The market has already fallen below the level at which it stood when Labour was elected in May 1997.

David Jones, chief market strategist at IG Index, said: "In the last major bear market which ended in 2003, the FTSE 100 traded down to the 3,300 area before starting the long climb up: that's the next level that traders are eyeing now, but the nagging doubt for many is that the economy today is in a much worse shape than back in 2003."

Yesterday's collapse in equities was accompanied by a further strengthening of asset classes seen, in relative terms at least, as safe havens. The gold price rose by 1 per cent to $952 an ounce, while sterling fell sharply against the dollar, dropping 1.6 per cent to $1.41.

The latest economic data will also inform the next meeting of the Bank of England's Monetary Policy Committee, which begins tomorrow. The MPC is widely expected to announce a further interest rate cut as well as moving closer to quantitative easing, the process through which it pumps money into the economy.