Almost £50bn is wiped off the FTSE 100 as investors take cover from the economic “perfect storm” of a eurozone sovereign debt crisis, problems in the US and fears over UK growth.
The FTSE 100 index in London fell 191.4 points, or 3.4 per cent, to 5393.1, losing £49.8bn of its value.
There has been a similar bloodbath on markets globally as the Dow Jones Industrial Average in the US, the CAC 40 in France and the DAX in Germany all plunged.
The markets have been spooked by fears that the global economy could be sliding back into recession amid a glut of bad financial news from different corners of the globe.
European Commission President Jose Manuel Barroso warned that the eurozone sovereign debt crisis is spreading, and action must be taken to prevent further panic.
He said the rescue packages so far had not convinced the markets that the eurozone was doing enough to resolve the crisis. Today’s stockmarket sell-off may have been sparked by a sharp rise in the cost of borrowing for the Spanish Government in a debt auction, signalling a lack of confidence from lenders in the country’s ability to deal with its debts.
The price of gold rose to $1665 an ounce as investors looked for safe havens.
Read more on the economic 'perfect storm' from Channel 4 News
UK 'will miss growth targets'
Barroso urges action to avert eurozone crisis
US out of the woods on debt - but for how long?
In another sign the crisis could be spreading further across the eurozone, it appears Belgium may have been added to the watch-list.
When the UK comes out of recession it’s often when the rest of the world comes out of recession. Right now the rest of the world is struggling. Professor Mike Wickens
The finance director of Lloyds Banking Group, Tim Tookey, revealed today the Financial Services Authority (FSA) has asked UK banks to detail their exposure to Belgian sovereign debt.
He said the FSA had added Belgium to a list of countries with sovereign debt problems, along with Portugal, Ireland, Italy, Greece and Spain.
Investors and economists are also concerned about events in the United States. The world’s biggest economy only narrowly avoided default earlier this week, but experts told Channel 4 News it is not out of the woods yet.
More weak economic figures from America have only compounded the problem. Today it revealed a slight rise in the number of people who have applied for unemployment benefits on the back of poor manufacturing and consumer spending data, raising fears it could slip back into recession.
In the UK, the head of the Government’s financial watchdog has warned that the country is likely to miss its growth targets for 2011. A leading economist says the UK cannot remain unaffected by problems elsewhere.
Professor Mike Wickens, a consultant to the International Monetary Fund (IMF), told Channel 4 News: “I think two things are important for the UK. One is, the US is clearly in a very difficult position. The other is the uncertainty caused by the European financial crisis.
“It’s not what we do that’s terribly important but it’s what the rest of the world does. When the UK comes out of recession it’s often when the rest of the world comes out of recession. Right now the rest of the world is struggling.
“There is always far too much emphasis on domestic policy and not enough realisation of the impact of the rest of the world.”