Panic grips markets as shares crash

London: FTSE 100 tumbles to five-year low; New York: Selling frenzy amid terror fears

Panic gripped stock markets across Europe and America yesterday after fears of renewed terrorist attacks and further corporate scandals sent share prices crashing.

More than £37bn was wiped off the London stock market as the FTSE 100 fell to the lowest closing level since Tony Blair came to power five years ago. The index of blue-chip shares tumbled 154 points, or 3.3 per cent, to 4,392.

In the past two days more than £60bn has been wiped off the value of the London market.

The fall means investors have lost all the gains they had made since Labour won power in May 1997 when the FTSE closed at 4,445. Only last month, the Prime Minister told MPs that the market was "massively up on where it was five years ago".

The Conservatives seized on the fall as evidence that the Government's economic policy was not working. Michael Howard, the shadow Chancellor, said: "There are many reasons why the stock market has fallen but it is also clear that there are serious imbalances in the British economy."

He said the Government had imposed £6bn of extra taxes and £6bn of red tape on business and 4,600 new regulations.

The market has lost more than a third of its value since it peaked just short of 7,000 on New Year's Eve 1999. The crash has wiped out more than £500bn of wealth from institutional and private investors. The next barrier would be the intra-day low of 4,220 just after 11 September. Des Flood, of Hibernian Investment Managers, said: "If we go through the September lows it could be a bottomless pit."

Chris Chaitow, at the stockbroker Collins Stewart, said the FTSE could be trapped between 3,000 and 5,000 for "many years to come. This looks like a bear market of the sort you only get every 20, 30 or 40 years."

But economists said the markets had given signs that the world had embarked on recovery from its worst recession for 10 years. Richard Graham, head of asset allocation at Barings Asset Management, said: "Our message to clients is not to despair and they will find there are buying opportunities out there."

The slump is expected to help persuade the Bank of England to keep interest rates on hold when its Monetary Policy Committee meets today. The falls will hit consumers' pockets and their confidence. The slump will also deal a fresh blow to pension funds.

Stephen Lewis, at Monument Derivatives in the City, said: "The fall in equity prices has now gone so far it is said to be undermining the solvency of some long-term investing institutions. Potentially, this constitutes a very serious threat to the economy."

Traders on Wall Street rushed to dump shares before today's Independence Day holiday, amid fears that terrorists planned to strike again.The Dow Jones Industrial Average fell below the 9,000 level before a spurt of late buying by bargain-hunters helped it to end up 47.22 at 9054.97. Stock markets fell across Europe, taking the slump on an index of the continent's 600 largest companies so far this year to ¤1,000bn (£650bn) of their market value.

The chief culprit was Vivendi, the French media giant at the centre of allegations over its accounting practices. It plummeted almost 22 per cent, dragging the Paris bourse down 3 per cent. Frankfurt and Lisbon markets were down 2 per cent and the Dutch bourse down 3.5 per cent.