Bush's attempt to talk up markets falls on deaf ears as confidence evaporates

The FTSE 100 crashed to its lowest level since September 1996 yesterday as the index of leading shares lost a massive 202.8 points to end at 3,895.5. The slide wiped £48bn from the value of blue chips and mirrored falls across the Atlantic.

On Wall Street, the Dow Jones Industrial Average ended down 3 per cent to close below 8,000 for the first time since October 1998. The much touted move by WorldCom to file for bankruptcy protection was among the reasons given by traders for the latest round of heavy falls along with a profit warning from the Dutch insurer Aegon and poor second-quarter figures from the US telecoms carrier BellSouth.

Analysts again pointed to the presence of forced sellers on bourses. European life insurers are said to have been actively selling equities yesterday to comply with regulations, along with American mutual funds that have also had to turn to cash as private investors try to redeem their investments.

The US President, George Bush, attempted to halt the panic as he expressed confidence in the economy. "I'm an optimist. I'm not a stock broker or a stock picker. But I do believe that the fundamentals for economic growth are real," he said in Chicago. "What is happening is corporate earnings are improving ... [and] I believe people are going to come back into the market," he stressed.

In early afternoon trade, his comments almost seemed to work as the Dow retraced a 300- point fall and briefly regained positive ground. But the index dived again later, ending down 234.7 at 7,784.6.

Citigroup led US blue chips lower with an 11 per cent fall amid fears about its exposure to WorldCom and a Senate hearing into Enron that starts today. A Congressional panel investigating Enron's collapse said it would detail how Wall Street banks helped Enron as the energy trader set up transactions to move debt off its balance sheet. Citigroup last night said the transactions it entered into with Enron "were entirely appropriate at the time". Other Enron lenders, including JP Morgan Chase, also fell.

Analysts said the market was still waiting for signs that a tentative economic recovery was feeding into corporate profits. Investors will be given the chance to gauge whether this is the case as nearly a quarter of the S&P 500 are due to post second-quarter earnings this week.

The list includes the giants Texas Instruments, AT&T and AOL Time Warner. Nevertheless, it may not be that simple. There was increasing talk yesterday among brokers and fund managers of the need for "total capitulation" before investors can expect any meaningful gains in shares. The phraserefers to the point when the last bull in the market throws in the towel and becomes a bear.

That may well have to be the case with both the UK market and the US trading well above their historic averages relative to earnings. Rolf Elgeti, a strategist at Commerzbank Securities, sees this as a distinct possibility although not inevitable. "When total capitulation occurs everyone will know about it," he said. Mr Elgeti believes it will be characterised by a very sharp fall in share prices on a single day amid panic selling. "Today was certainly not it," he stressed and warned investors not to expect indices to return exactly to their historic averages given the low-interest rate environment.