Markets suffer worst fall since 1987

More than £120bn was wiped off the value of the stock market in September, making it the worst month since the crash of October 1987.

The FTSE 100 index of the UK's biggest companies shed more than 500 points last month, including a 185-point lurch downwards yesterday, as investors decided the world economy is heading for a second sharp slowdown.

The UK market was catching up with two days of sharp falls on Wall Street, where fears over war in Iraq have compounded nervousness about the outlook for the economy. A manufacturing survey yesterday was interpreted as meaning that US industry is about to tip back into recession.

The FTSE 100 was down 5 per cent to 3,721, making a 12 per cent fall on the month. The Dow Jones Industrial Average was down 1.4 per cent at 7591.9, its lowest close since August 1998.

The stock market slump is putting pressure on pensions and life insurance policies, where savings have been invested in shares. Standard Life, the Edinburgh-based mutual, yesterday became the latest to slash the final bonuses it pays out on policies, saying it will reduce them by 10 per cent from this morning. It is also introducing a 10 per cent penalty on savers cashing in their policies early.

Shares in the UK's biggest life insurance companies, including Aviva, which owns Norwich Union, and the Prudential are all close to seven-year lows. And over the weekend, Equitable, which is fighting to stave off insolvency, said it had sold out of the stock market entirely to halt the decline in its funds.

Michael O'Sullivan, a strategist at Commerzbank, said investors had abandoned shares in favour of risk-free government bonds in huge numbers over the past few weeks. "This fulfils the prophesies of the doomsayers who say that September is always a bad month. The most unfortunate thing for people who are superstitious is that October is also traditionally difficult," he said.

City analysts said the prospects for the global economy appeared to have deteriorated markedly over the summer. These worries have been compounded by concern that a war in Iraq could send oil prices soaring and put another dent in company profits.

The FTSE 100 has lost 46 per cent of its value since peaking on New Year's Eve 1999.