Record oil prices and fears over the financial health of two US mortgage giants sent shockwaves through the UK's leading shares today.
London's FTSE 100 Index tumbled 2.7 per cent to 5261.6, wiping £34.5 billion off the value of blue-chip firms.
The fall marks the Footsie's lowest close since October 2005 and puts it firmly in "bear market" territory - defined by a fall of 20 per cent or more from its peak in June last year.
The falls came as oil soared to a new record high above 147 dollars a barrel and fears over mortgage lenders Fannie Mae and Freddie Mac gripped Wall Street.
The two companies hold or guarantee around five trillion dollars (£2,500bn) worth of US mortgages, but concerns have mounted over the strength of their finances to cope with rising arrears in a slumping housing market.
US treasury secretary Henry Paulson appeared to rule out a Northern Rock-style rescue if either firm ran into trouble, saying the Treasury's focus was on supporting the two businesses "in their current form".
But Wall Street's Dow Jones Industrial Average was down 2 per cent amid worries that the failure of one or both would wreak havoc on the nation's financial system and the broader economy.
CMC Markets sales trader Adam Seagrave said: "The state of the US financial sector is on the watch-list for many with the health of Fannie Mae and Freddie Mac dominating."
After falling in recent days, oil prices surged again when Iran's state media reported a series of missile tests, including one munition that could reach Israel.
Iran is a member of the oil-producing Opec cartel but Israel responded with a pledge to act if its national security was threatened - ratcheting up fears of military action in the region which could disrupt supply.
Other factors behind the price rise include instability in Nigeria - a major supplier of crude to the US - and worries over a weak dollar, persuading investors to switch into commodities as a hedge.
Prime Minister Gordon Brown is to discuss what help Britain can offer Nigeria to maintain supplies of oil from its troubled Delta region when the country's president Umaru Yar'Adua visits London next week.
Speaking at the G8 summit in Japan earlier this week, Mr Brown said the UK was ready to offer assistance to help deal with "lawlessness" which has disrupted oil supplies from the Niger Delta.
Assistant Commissioner Tim Godwin said he could understand why some people perceive that knife crime is spiralling out of control.
But the senior officer, who is responsible for territorial policing, said that in reality only a tiny proportion of young people carry weapons.
He said police research of those areas where stabbings are most prolific found just one in 50 young people carries a knife.
And only 730 weapons were found during searches of 32,000 people during the recent anti-crime knife blitz, he said.
Speaking on Sky News, Mr Godwin said: "Our evidence indicates it is about two in 100 young people that we need to sort out and I am convinced that London together with the police and other agencies will get to them."
He added: "I am confident that if we maintain our resolve, work together, identify whoever it is and pursue them then we will make a difference in London."Reuse content