The panic began in Tokyo where stocks fell to a 12-year low after one of the gloomiest business survey in years. Then it quickly spread to London and New York, fuelled by more grim economic news and the disclosure that a leading US bank had a near $1bn exposure to the troubled "hedge" funds.
With the Dow Jones industrial index closing 210 points down and 18 per cent lower than its July high, some US analysts are now seeing a resemblance to the 1929 Wall Street crash.
In the UK, Laura Ashley and Austin Reed warned of deteriorating trade, Rover announced a one-month closure of its giant Longbridge car plant, and the Marks & Spencer chairman, Sir Richard Greenbury, admitted job losses in the clothing industry were "inevitable".
The FTSE 100 Index of leading shares lost 3 per cent, closing 156.2 points down to fall below 5,000 - a drop of 21 per cent in three months.
Traders were unnerved by the slump in bank shares and the latest Purchasing Managers survey showing the sixth consecutive decline in manufacturing activity. Exports orders, employment and prices all registered steep declines, prompting the investment bank ABN Amro to warn of "a more serious dip into recession".
Stock markets across Europe also fell as a rash of downgrades of bank shares hitdealing rooms. The Lisbon exchange was forced to close for two hours amid panic selling.
In New York, the Dow Jones registered a 210-point drop, for an 18 per cent fall since July. The US's 7th largest bank, Bankers Trust, said its hedge fund exposure was $850m.
Analysts said the results of the latest quarterly Tanken survey of industry showed Japan's recession had not yet hit the bottom. Tokyo's Nikkei Index fell 1.5 per cent, and briefly brushed the 13,000 level.
The gloomy results from the UK Purchasing Managers Survey were blamed on sterling's strength and weakening world trade. Rover blamed these two factors for the temporary closure in December of the Longbridge plant.
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