Shares slump on Wall Street despite rate cut

The New York stock market suffered its worst fall since the crash of 1987 yesterday when Wall Street opened for the first time since last Tuesday's terrorist attacks.

Traders refused to be comforted by an unexpected cut in interest rates by America's central bank and ignored a plea by the Bush administration to "buy America".

The Dow Jones index of America's blue-chip industrial giants plunged below the crucial 9,000 barrier for the first time since 1998 to close at 8,921. By mid-afternoon it had tumbled as much as 684 points, or 7.1 per cent ­ its steepest fall since Black Monday. At the same time, the technology-heavy Nasdaq was down 115 points or 6.8 per cent at 1,579.

Earlier, Tokyo's benchmark Nikkei index had tumbled 5 per cent, or more than 500 points, to hit a fresh 17-year low.

However, shares surged across Europe as traders breathed a collective sigh of relief that the Dow had not plunged by 1,000 points, as many had feared. In London, the FTSE 100 index ended the day up 143 points, or 3 per cent, thanks to a late surge after the news of America's interest rate cut. But the increase made up less than half of the 300-point fall suffered last week, when Wall Street remained closed.

Speculation was growing last night that the Bank of England would follow the US with a rate cut, possibly as soon as today. "We should see a cut of 0.5 per cent within the next 24 hours," said Danny Gabay, UK economist at investment bank JP Morgan in London.

Airline stocks were hardest hit, with Continental down almost 50 per cent. Delta, United and American Airlines all lost about 40 per cent of their value on fears of massive losses and possible airline bankruptcies. In the UK, Virgin Atlantic announced 1,200 lay-offs. US Airways last night announced 11,000 job losses and a 23 per cent cut in capacity and American Airlines, Delta and NorthWest are expected to announce similar cutbacks. Analysts and aviation experts are now forecasting 100,000 job losses in the US airline industry this year and combined losses of $5bn (£3.4bn) to $7.5bn.

An hour before the start of trading, the US Federal Reserve Board announced that it was cutting interest rates by a half-point to 3 per cent, the lowest level in seven years.

Analysts said that the fall on Wall Street would have been even worse without that boost to confidence. "The Fed are in charge, they're there," said Ian Morris, the chief US economist at HSBC Securities in New York.

The Federal Reserve said: "Even before the tragic events of last week, employment, production and business spending remained weak and last week's events have the potential to dampen spending further." It said it would stand by to act again "until more normal market functioning is restored" ­ a hint that it may cut rates further if the drop in share prices turned into widespread panic.

Earlier, Paul O'Neill, the US Treasury Secretary, said he expected US investors to "act like Americans" ­ a call not to engage in panic selling.