European markets tumble as confidence collapses

Share prices in the UK plunged yet again yesterday, piling more misery on Britons saving for their pension, as world markets continued to come to terms with the prospect of a recession.

The FTSE 100 index fell 5 per cent, on top of Wednesday's 7 per cent decline, as confidence in the banks receded and heavyweight mining and oil companies suffered heavy losses.

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The performance was reflected across Europe, where benchmark indices in Germany and France fell by similar levels. Signs of a weakening US economy contributed to the fear and confusion.

Yesterday's retreating confidence in London followed serious declines in Asia in the morning. Japan was a particular casualty – its Nikkei index shed 11.41 per cent, its worst fall since the domestic crash of 1987.

Peter Dixon, economist at Commerzbank, said: "The falls show that the market fears global recession. The data out of the US has not helped, and it suggests that maybe the problems are properly filtering through to the real economy."

The mass collapse came despite European Union leaders pledging to underpin growth and support jobs.

The UK stock market slump came with a relatively indiscriminate sell-off across the market, with only eight stocks in positive territory. Traders were in shock, with one saying: "The whole market is irrational; there is proper panic out there." He added that the hugely volatile situation had market participants overreacting.

The banking sector suffered as the Swiss giants UBS and Credit Suisse became the latest European financial groups to seek help. The Swiss government injected SFr6bn (£3bn) into UBS, which has already been severely battered by the credit crunch, and agreed take $60bn (£35bn) worth of illiquid assets off its hands. Credit Suisse announced it had turned down an offer of help from the government but would seek to raise $8.75bn from private investors. One market maker was in no doubt that the news had dragged the sector lower. "Despite the early week's rally, it is doom and gloom out there. People think there are more disasters to come from the financial sector across Europe."

Standard Chartered was the worst performing bank stock in the UK, shedding almost 13 per cent, while Barclays was down more than 10 per cent.

Elsewhere, falling metal prices – especially copper, platinum and gold – sent mining shares down more than 14 per cent. The prices have been hit by investors needing to raise cash to cover losses in other investments as well as fears of falling demand from China.

One metals trader said: "This is the irrational side of the market. The demand has slowed but it hasn't stopped."

Major oil companies were also down as they tracked the crude price lower, with Royal Dutch Shell falling to a three-year low after oil prices fell beneath $70 a barrel. The price of oil, which has been stinging consumers for most of the past year, has suddenly collapsed because a recession will reduce industry's need for fuel. After another big slide yesterday, a barrel of oil now costs less than half what it did in July.

There were signs last night that the latest downward lurch by markets could be halted this morning, and there was a strong late rebound in US equities. The Dow Jones Industrial Average, which measures 30 blue-chip stocks traded in New York, reversed a 300-point plunge and ended up 400 points, or 4.7 per cent.

Traders say that the stock markets are more volatile than ever before. The Vix, which tracks volatility in the US market and is sometimes referred to as the "fear index", was at an all time record yesterday, rising above 80 points.

Amid the confusion, however, there were some signs for optimism in the credit markets, where the worst of the financial crisis is being felt and which must heal quickly if the world is to avert a serious downturn. The freeze in the credit markets, which has paralysed banks, affects the real economy because it has made it hard for businesses and consumers to get the credit they need. Optimists pointed yesterday to another fall in Libor rates, suggesting the unprecedented government intervention of recent days is helping. Libor is the interest rate at which banks are willing to lend to each other, and the overnight rate fell 0.2 per cent to 5.17 per cent.

With the consensus of economists now believing that the US is headed for or already in a recession, the latest unemployment data gave clues as to how deep the slowdown may be – and it was not reassuring. The number of benefit claimants has risen to 3.7 million, the highest since June 2003, when the US economy was crawling back from the bursting of the dotcom bubble. US industrial production also fell in September by the most since 1974.