Investors who earlier in the week had returned cautiously to the market on hopes that a co-ordinated G10 initiative to cut interest rates was imminent were again seeking the safe haven of American and European bond markets.
Sentiment was also hit by news that the International Monetary Fund is cutting its world growth forecast this year to 2 per cent in response to the global financial turmoil.
The London-based Economist Intelligence Unit downgraded its world growth forecast in the light of the Russian financial collapse to 2.1 per cent this year and 2.4 per cent next year, the weakest outlook for the world economy since 1981/82. It amounts to a warning that there is a significant risk of global recession.
New York's Dow Jones stock index, which on Wednesday had been more preoccupied with the fate of President Bill Clinton than the implications of Mr Greenspan's remarks, yesterday opened 200 points down at 7,886.
In Europe it was Paris and Frankfurt which fared worst, registering falls of 5 per cent. In Paris the weak dollar, coupled with profits warnings from French telecommunications giant Alcatel - a key local index constituent - stoked worries about exporters' ability to maintain earnings in fast- contracting markets.
In the City the FTSE 100 closed down 158 points at 5,132.9, a fall of 3 per cent. Tokyo and Hong Kong also suffered severe falls yesterday.
"What we have been seeing is suckers' rallies," said Nick Stevenson, European strategist at Paribas. "All the talk of European corporate restructuring and the growth of the equity culture in Europe was the icing on the cake. But where is the cake?"
Markets were again preoccupied with the fate of Brazil, where the key stock market index, the Bovespa, was showing a fall of 7.69 per cent. Optimism earlier in the week that the combination of an IMF bail-out and American interest rate cut would stave off collapse was dwindling fast.
According to the EIU, "a collapse in Brazil would bring the rest of Latin America down with it, in effect eliminating demand for a further 18 per cent of US exports". It points out that the emerging markets crisis has already affected 32 per cent of US exports.
Nick Stamenkovic of Bank Austria says survey data released yesterday by the Philadelphia Federal Reserve shows that some parts of the US economy are already being affected. US rates could still fall, albeit later than the market hoped, said Mr Stamenkovic. But he warned: "Even if the Fed provides some easing it will only provide temporary relief for the equity markets."