Markets slump amid fresh debt fears

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European markets slumped deep into the red today as renewed fears over the continent's debt crisis added to concerns over a potential multibillion-pound US lawsuit launched against Britain's banks.

Taxpayer-backed Royal Bank of Scotland fell more than 10% after it was singled out by a broker as the most vulnerable British target of claims made by the US Federal Housing Finance Agency (FHFA) over the subprime mortgage scandal.

Barclays and HSBC, who joined RBS on the list of 17 banks, fell 6% and 3% respectively, while Lloyds Banking Group, damaged by weakened sentiment, fell 6%.

The wider FTSE 100 Index fell more than 2% as losses were compounded as borrowing costs for Italy and Spain began to creep up again, signalling weakening confidence in the countries' finances.

Elsewhere, the reasserted concerns over the eurozone debt crisis saw Germany's Dax and France's Cac-40 both slide 4% while a national holiday in the US meant there was no direction from the other side of the Atlantic.

The FHFA claims the banks misrepresented the quality of billions of dollars of home loans sold to America's state-backed mortgage giants Fannie Mae and Freddie Mac.

RBS sold 30.4 billion US dollars (£18.8 billion) of securities, Barclays sold 4.9 billion US dollars (£3 billion) and HSBC sold 6.2 billion US dollars (£2.8 billion), according to the regulator.

Broker Investec said the FHFA lawsuit could hit RBS more than its peers due to its greater exposure. But RBS has said the allegations are unfounded and it will defend itself against them vigorously.

There was more gloom for the banking sector in a report by forecasters at the Ernst & Young ITEM Club.

The financial services sector in the UK faces sluggish growth, the ITEM Club warned, threatening the recovery prospects of the wider economy.

The worst US employment data for nearly a year, showing the number of people employed in August was flat, fuelled fears of a new global recession.

The renewed concerns over growth hit the heavily weighted mining sector, sending shares in copper giants Kazakhmys and Antofagasta to the bottom of the FTSE 100 Index.

Oil prices were also damaged by the concerns over global demand with Brent crude in London dropping more than 1% to 110.91 US dollars per barrel.

The retail sector was also on the back foot after accountancy firm BDO said the high street recorded its worst sales in two years in August as the riots that shook the UK had taken a heavy toll.

This was underlined by a Purchasing Managers' Index survey for the services sector, revealing the sharpest slowdown in growth since the foot-and-mouth crisis in 2001.

Elsewhere, Ann Harvey and Kaliko owner Alexon Group slumped nearly 23% after it warned like-for-like sales plummeted 9% in August and it now expected its full-year performance to be well below expectations.

High street bellwether Marks & Spencer fell 3%, B&Q parent Kingfisher dropped nearly 3% and Currys and PC World owner Dixons Retail shed more than 7%.

The renewed fears over global growth saw traders plough into safe-haven asset gold, which was higher at 1892 US dollars an ounce.

Gold miner Randgold Resources was one of two risers on the FTSE 100 Index, adding just 0.6% to its value.