Economic fears send shares deep into red

Global stock markets plunged yesterday after downbeat economic forecasts in the UK and United States sent investors reeling.

The FTSE 100 index closed 131.2 points lower at 5,245.21 - a fall of 2.4 per cent, the biggest percentage drop in six weeks - as the Dow Jones Industrial Average also tumbled soon after opening.

Volumes on the FTSE 100 were low, as would be expected during the summer, reaching 91 per cent of the 90-day daily average.

Investors grew concerned over the world's biggest economy after the US Federal Reserve downgraded its outlook and began using proceeds from mortgage bonds in an effort to keep borrowing costs low.

James Hughes, market analyst at CMC Markets, said: "We were expecting major quantitative easing (from the Fed], and what we got was QE-light."

Geoff Wilkinson, head of investment research at Mint Securities, added: "The whole point of quantitative easing is that it is trying to fix a very serious problem. There are two ways of looking at it: is it a cure, or does it reflect a significant underlying problem? The market has chosen to say that it's an indicative of the fact that the situation is still deteriorating, and unless the Fed comes out with a much larger package, we are looking at the problem here, not the solution."

Asian markets had earlier finished in the red after new figures showed that China's industrial growth slowed further in July, casting a cloud over the pace of the global recovery.

Bank of England Governor Mervyn King added to uncertainty by downgrading growth forecasts and warning that the UK faced "a choppy recovery".

The pound weakened against the dollar as analysts said the Bank's inflation report suggested interest rates were unlikely to rise any time soon. Sterling fell nearly 1 per cent to $1.57.