The FTSE 100 fell nearly 180 points, its sixth-biggest decline in points terms, wiping pounds 36bn on paper off the value of leading shares. On Wall Street, the Dow Jones had at one stage dropped more than 200 points.
US government bonds and the dollar also dived in value as investors stampeded out of the US. There were rumours in the financial markets that hedge funds were at the forefront of the turmoil.
Whoever started it, the trigger was news of a higher than expected increase in wage costs in the three months to June. The figures came on the heels of a second warning in as many weeks from Alan Greenspan, the chairman of the US Federal Reserve, that the jobs market had grown worryingly tight. Mr Greenspan is now expected to raise interest rates next month.
Unemployment in the US is at its lowest for a generation. But it is only now translating into accelerating pay and benefits - signalling, perhaps, the beginning of the end for what optimists had claimed was a "new era" for the US economy.
Business, page 14
Outlook, page 15