Billions of pounds were wiped off market values as European exchanges sank to new lows for 1998. Some analysts are even beginning to point to a scary resemblance to the 1929 Wall Street Crash.
"I'm half frightened and half bearish," said Barton Biggs, chief global strategist at Morgan Stanley Dean Witter. "There is still a chance that we'll have a rally that is going to last a couple of weeks and take up another 5 to 10 per cent before we plunge into the abyss."
The worst-hit market was Lisbon, which had to halt stock trading for two hours after shares dived 15 per cent in what was described as "near panic" selling.
Wall Street was hit by the disclosure that Bankers Trust is owed $850m by hedge funds, sending the Dow Jones down 166 points or more than 2 per cent to 7,675 by lunchtime.
In London the FTSE 100 index closed down more than 3 per cent at 4,908. The latest purchasing managers survey showing manufacturing activity declining for the sixth successive month added to the gloom. The index now stands at 20 per cent below its July peak.
Employment and price indices both showed steep falls, as did Britain's export performance. The beneficiaries were again bond markets, which registered strong gains.
In Tokyo, the September Tankan survey of industrialists showed business confidence at a four-year low, sending the Nikkei reeling 209.27 to 13197.
Continental bourses fared even worse than London, with the main Frankfurt and Madrid indices showing falls of 7 per cent or more.
The grim news continued, with ING Barings cutting its 1998 earnings forecast and axeing 1,200 of its 9,000 staff worldwide. Around 40 of the jobs lost will be in London.
The Bank of Italy then admitted an investment of $100m in Long-Term Capital Management, the hedge fund that was the subject of the $3.75bn bail-out last week. The bank said it had also lent a further $150m.
Dresdner Bank shares fell after an informal briefing from its chief executive, Bernhard Walter, warning that market turmoil would hit third-quarter earnings. Dresdner is one of the European banks that invested in Long- Term Capital before the fund had to be bailed out.
In Washington, Michel Camdessus, managing director of the International Monetary Fund, and James Wolfensohn, World Bank president, urged the G7 group of leading industrialised nations to take action to alleviate the global crisis. Lower interest rates in the US and Europe were part of the solution, according to Mr Camdessus, as was action on debt relief.
Mr Wolfensohn said the G7 needed to be more aware of the linkages between the developed and the developing economies. "They [G7 economies] have to understand that the problems of the developing countries are their problems too," he said.
Speaking in advance of the annual IMF/World Bank meetings in Washington, Mr Wolfensohn gave a cautious welcome to proposals made on Wednesday by Gordon Brown, the Chancellor of the Exchequer, for a global regulator of the world's financial markets.
The World Bank president said he would be "perfectly happy" to take part in any such programme, and looked forward to discussing the details with Mr Brown.
The Nikkei fell to fresh 12-year lows after the Bank of Japan's Tankan survey showed business confidence slumping dramatically, prompting fear of bankruptcies
and fuelling concern that recession in Asia will spread around the world. .
Blue chips plunged to their lowest since December on the IMF warning of a global recession and worries the banking system will have to contend with more hedge funds running into difficulties. One again banking shares were under intense pressure. Barclays lost another 71p to 890p and Lloyds TSB gave up 57p to 602p. Footsie closed off 156.2 points at 4,908.2 after being as low as 4,881.3, Supporting shares were also hammered, touching levels not seen for more than two years. Centrica, the gas group, was the best performing blue chip, up 4.25p at 118p.
The Xetra Dax fell more than 7 per cent to its lowest level since December 1997, as worries grew over German banks' exposure to emerging markets.
Analysts fear the market is heading for 1929-style crash.Reuse content