Prices were already foundering late on Friday as the US went into free fall, cutting short the celebrations to mark the FT-SE 100 index breaching the 5,000 barrier for the first time on Wednesday.
US stocks suffered their worst one-day slide in more than six weeks. Bond yields surged, spurred by weak demand for new government debt and concern that inflation may be poised to accelerate, undermining confidence in corporate profits.
"If long-term interest rates continue to go up, stocks will continue to go down," said Charles Smith, a money manager at Fort Pitt Capital Group.
Bank shares such as Citicorp and Chase Manhattan and other financial companies will suffer the most, as their profit growth is interest-rate sensitive.
The Dow Jones Industrial Average fell 156.78 points on Friday to 8,031.22, or 1.9 per cent having reached a record 8,259.31 only last Wednesday. Only AT&T rose among the 30 stocks that make up the index. The market is still, however, up 24.6 per cent in 1997.
UK shares are registering a growing split between companies whose fortunes depend on the fluctuations of the pound and those more insulated from the swings of the currency market.
The Bank of England's success in talking down the pound after its fourth rate rise in as many months on Thursday was reflected in the stock market. The leading FT-SE 100 fell 55.5 points, or 1.1 per cent on Friday. On the other hand, the broader 250 Index soared, notching a 3.6 per cent gain in the week. Shares such as BBA and Williams Holdings that suffered falling profits as the pound soared against European currencies were snapped up.
The FT-SE 250 Index's gains this week hoisted the stock measure firmly into positive territory for the first time this year, and some investors say this could be the beginning of a broader recovery for Britain's beleaguered exporters.
"What you are going to see is more industrials, more of the 250s, reporting in the days ahead. They'll probably be reporting dullish figures, but on the other hand, people might say that's history," said John Hatherly, head of research at M&G Investment Management.