Fears intensified amid concerns that more bad news from banks could emerge while US markets are closed for Thursday’s Thanksgiving holiday.
Analysts said investors were becoming increasingly worried that funding problems among financial institutions could drive the faltering US economy into a recession next year, curtailing global economic growth.
Investors are likely to be further unsettled by an Organisation for Economic Co-operation and Development report saying deteriorating conditions in the US subprime markets could lead to losses of$300bn in the collateralised debt obligation market.
After a sharp opening decline, Wall Street recovered in later trading but there were heavy falls in Asia and Europe.
The slide in global shares came as oil approached $100 a barrel – though it fell back sharply – and the dollar set a record low of $1.4856 against the euro and $1.1025 against the Swiss franc. The dollar also fell to Y108.27, its weakest level since May 2005 against the Japanese currency.
The S&P 500 fell 1.3 per cent and briefly entered negative territory for the year. At midday in New York the index was just 0.2 per cent higher for the year and back at levels seen in mid-August when the credit squeeze erupted.
The S&P financials sector fell 2.1 per cent and is now at its lowest level in two years. Freddie Mac, the US government-sponsored mortgage agency, fell 3 per cent to $25.94 after plunging 28.7 per cent on Tuesday in the wake of reporting a $2bn loss.
In London, the FTSE 100 declined 2.5 per cent and the FTSE Eurofirst 300 index fell 2.4 per cent. Hong Kong’s Hang Seng index lost 4.2 per cent and the Nikkei 222 fell 2.5 per cent.