• FTSE closes down 3.4% - a 12-month low
  • Dow Jones also falls by more than 350 points in morning trading
  • Spanish and Italian markets drop 3%
  • BoE holds interest rates at 0.5% for 29th month in row
Stock markets plunged yesterday in the biggest rout since the height of the financial crisis three years ago.

Panic tore through global financial centres, raising fears of a new world recession.

The FTSE 100 index saw £50billion wiped off the value of Britain's biggest companies, bringing a total fall of £125billion in the space of only a week.
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© ReutersMajor losses: A trader on the floor of the New York Stock Exchange contemplates the eighth biggest fall in Wall Street history yesterday

There were even worse losses on Wall Street, which experienced the eighth biggest fall in its history.

The Dow Jones lost 4.31 per cent of its value - the largest drop since October 2008 and its ninth plunge in ten days.

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© PA
The latest meltdown was triggered by the failure of European leaders to deal with the debt crisis crippling the single currency.

There are also fears that the mighty U.S. economy could slide back into recession and drag the rest of the world down with it.

'Investors are defiantly pessimistic,' said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers in London. 'It is nearing capitulation, a mass sell-off.'

In a dramatic admission of the scale of the single currency crisis, European Commission president Jose Manuel Barroso conceded for the first time that major eurozone economies are now in danger.

The Brussels boss warned that the debt maelstrom means Spain and Italy may be too big to rescue.

But he also called for a dramatic increase in eurozone funds for future bailouts, which could mean British taxpayers forced to contribute through the International Monetary Fund.

British taxpayers have already stumped up around £13billion to rescue Greece, Ireland and Portugal, with Rome and Madrid tipped as the next dominos to fall.

To make matters worse, the United States has been hit by a torrent of bleak economic news, triggering fears that it is heading for a double-dip recession. Unemployment figures today could wreak further havoc in the financial markets.

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© PADicey: The London Stock Exchange, where shares have fallen again
One trader said the turmoil was reminiscent of the start of the banking crisis in 2008 when shares plunged day after day before the global economy fell into recession.

The market turmoil comes at a difficult time for the UK Government because David Cameron, Chancellor George Osborne and Deputy Prime Minister Nick Clegg are all abroad on holiday. If it continues, MPs are likely to call for them to return to safeguard Britain's interests.

The FTSE 100 index fell 191.37 points or 3.43 per cent to 5393.14 - its lowest level since September last year.

The FTSE 250 - often seen as a better barometer of the UK economy because it contains fewer foreign companies - dropped even further, by 3.86 per cent.

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© unknownTurmoil: New York traders found some equilibrium on Wednesday night, but it failed to calm nerves in London

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Huge dip: The FTSE 100 fell by 191 points yesterday, a drop of more than three per cent compounding losses over the past week that now total £120bn
It was the fifth straight day of heavy selling in London and came as fearful investors dumped shares and other risky assets and piled their money into safe-havens such as gold.

But even gold was not immune to the turmoil. After soaring to a record high above $1,680 an ounce, it dropped below $1,650 as rattled investors sold bullion to cover losses in the stock market.

The loss of confidence in financial markets threatens to spread to the wider economy as shareholders suffer heavy losses and workers and pensioners see their retirement pots dwindle.

The bloodbath in London was echoed around the world with the French stock market down 3.9 per cent in Paris and the German index off 3.4 per cent in Frankfurt. The Italian stock market sank more than 5 per cent in Milan, making it the biggest faller in Europe.

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Fears are mounting that Italy and Spain will not be able to repay their debts and may require bailouts worth hundreds of billions of pounds.

Mr Barroso did little to reassure the financial markets when he warned that the crisis is spreading and more money was needed in the emergency pot.

In a letter to European leaders, he also criticised last month's second bailout of Greece, which has failed to stem the rising panic on financial markets.

Mr Barroso said 'the complexity and incompleteness' of the package had led to 'a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis'.

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© PAWorries: Mervyn King, Governor of the Bank of England, which has held interest rates for the 29th month in a row amid fears of a second recession
He said the £380billion fund should be significantly enlarged.

'We are no longer managing a crisis just in the euro area periphery,' said Mr Barroso. 'Euro area financial stability must be safeguarded.'

Will Hedden, a trader at IG Index, said: 'It has been another rout. Traffic has been one-way - sell, sell, and sell. It is the problems of European sovereign debt and faltering global economic recoveries that are weighing on markets.

'Financial markets are still not convinced that politicians have a strategy for dealing with the increased perception of risk around Italy and Spain.

'For many traders this week has felt like the start of the banking crisis in 2008, which would go some way to explaining the panic selling we have seen.'

It was in September 2008 that Wall Street investment bank Lehman Brothers collapsed as the crisis spiralled out of control. It triggered the longest and deepest recession since the Great Depression in the 1930s.

The West has barely emerged from the downturn - and already there are fears that the developed world is once again at tipping point.

Walter Todd, a fund manager at Greenwood Capital in South Carolina, said it was the 'perfect storm' for the stock market.

Interest rates in Spain and Italy hit record highs - making it ever more difficult for both countries to borrow money on the international money markets.

And it emerged last night that Britain's financial watchdog has been pressing UK banks to reveal their holdings of Belgian debt in a sign that the debt crisis is hurtling towards the heart of the eurozone.

Lloyds Banking Group yesterday outlined its exposure to the nation, which was added to a list that includes Ireland, Greece, Portugal, Spain and Italy.

Belgium's surprise inclusion on the list of the single currency's walking wounded followed a lobbying campaign from the Financial Services Authority.

It points to deepening concerns over Belgium, which has high debt levels and has not had a government in over a year.

money, Euro
© AlamyFinancial matters in the Eurozone are going from bad to worse
An alarming echo of the 1930s slump
By Alex Brummer, City Editor

Let's reckon this is not a phoney war. Let's reckon Italy really is heading for insolvency. That means it is going to be looking for a rescue from the EU - and soon.

But what happens when a country that is 'too big to bail out' has to have a bailout?

Of course, Italy could actually do the smart thing and not go for a bailout at all, and instead go for a default.

Certainly, market analysts at the Centre for Economics and Business Research said yesterday that Italy is bound to default.

Because of the very sluggish growth in southern Europe as a result of staying in the euro, 'the maximum sustainable bond yield is nearer to 4 or 5 per cent,' not the 7 per cent quoted for countries with optimistic growth forecasts. Italy has been at more than 6 per cent.

But an Italian default would make contagion rip through every Eurozone country. Even Germany and the five other Eurozone economies which still have triple-A credit ratings would be shaken.

Certainly that would make the core six start thinking again about the creation of a new 'Deutsch-euro' for themselves. The weak peripheral countries would be broken off and forced back to their own independent currencies, or into a 'Club Med euro'.

Or instead Italy could take a 'bailout' rigged up by the EU as big bond purchases by EU institutions. This might stop the rise in bond yields, which would allow Italy to go on servicing its debt and not default, at least not this year. The ECB is back in the markets, trying to do just that.

Trouble is, the ECB has taken on too many weak assets by buying up debt from insolvent countries such as Greece.

The big idea from the Eurozone agreement on July 21 is that the EFSF, the existing bailout fund, will be turbo-charged with double or more the €440billion it already has. It would use this new money to buy bonds from countries such as Italy.

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© AlamySimilarities? The worldwide depression of the 1930s saw economic meltdown and mass unemployment
But here's the problem: As Eurointelligence has pointed out, a higher EFSF lending size would require that the bail-out's bonds be 'joint and several'. That means Germany, the Netherlands, Finland and the other sober members of the Eurozone would be liable for Italy's debt if it or any other bailed-out state defaults.

Are they going to let their governments agree to this? Unlikely. If just one country says 'No', this idea is dead.

Another possibility: Italy agrees to implement even more EU-directed austerity. But the problem is that its economy, even with its old high spending and lax attitude towards tax, has not grown at all in the last ten years.

Higher taxes and more spending cuts will push it well into recession. The CEBR calculates that by 2017 the debt-GDP ratio in Italy will have grown to more than 150 per cent. It will be unable to service its debts.

Result: Market turmoil. Italy defaults, and the Eurozone continues in crisis. Which is the same result of every other solution the Eurozone is considering.

Can the Eurozone bosses come up with no happier ending than that? Well, they could. They could admit the euro was a mistake and should now be broken up.

But it is unlikely their EU ideology will allow them to admit that. You would have more luck asking the Vatican to reconsider the doctrine of Papal infallibility.

So the turmoil, and the defaults, and the crisis will continue. World without end.