Bloodbath on the bourses as recession fears spark slump

The fresh sell-off, which wiped some 62 billion from the value of the 100 biggest companies, was triggered by a warning that the United States and eurozone economies are "dangerously close to recession".

Heavyweight banking and mining stocks were among those worst hit as investment bank Morgan Stanley attacked policymakers and predicted that the European Central Bank (ECB) would have to reverse its interest rates policy.

Royal Bank of Scotland slumped 11.3 per cent to 21.95p, Lloyds Banking Group dived 9.3 per cent to 29.8p and Barclays plummeted 11.5 per cent to 154p.

Traders pointed to fears over major banks' exposure to the eurozone debt crisis, while the ECB yesterday confirmed it had lent some $500 million (303m) to an unnamed eurozone bank. The loan, made on Wednesday, was the first of its kind since February, and a further sign of the uncertainty sweeping the eurozone economy.

In Europe, Germany's Dax index tumbled 5.8 per cent, while the French Cac lost 5.5 per cent. Across the Atlantic, the Dow Jones Industrial Average was 3.5 per cent lower by the London close, recovering from a 5 per cent plunge at the open.

Michael Hewson, market analyst at CMC Markets, said: "European markets have had the rug pulled out from underneath them.

"The banking sector has been hammered hard on concerns about the health of one of Europe's banks after figures showed that the ECB made a loan of $500m for a week to an unnamed bank, while growth concerns raise fears about their future profitability."

The price of gold hit another record high, at $1,829.7 an ounce, as investors spooked by the prospect of a return to recession sought a safe haven. Gold prices have more than doubled since the recession began in the winter of 2007 and are up about 19 per cent since the beginning of June.

The heavy falls for equities are also creating opportunities to buy shares, according to several stock brokers.

A poll carried out by Barclays Stockbrokers before yesterday's bloodbath showed that 47 per cent of investors believe the Footsie will recover to sit above 5,500 before the end of the year, with one-in-ten expecting it to top 6,000.

The stock market falls came as Andrew Haldane, executive director for financial stability at the Bank of England, warned that financial regulators - including his colleagues at the central bank - need to help markets overcome an exaggerated risk aversion that threatens to hamper the economic recovery. Markets' short-termist perspective has led to an unduly pessimistic outlook that is worsening the impact of headwinds from some necessary responses to the crisis, such as public and private sector debt reduction, he said.

"Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster," Haldane wrote in a paper published by the Bank.