Markets in meltdown amid new global recession fears

Markets in London and New York plummeted as US bank Morgan Stanley warned of a new global recession. Photograph: Stan Honda/AFP/Getty Images

Financial markets on both sides of the Atlantic were convulsed by a fresh wave of selling amid fears that the world economy is sliding back towards recession.

The FTSE 100 closed down 239 points, or 4.5%, at 5092, wiping more than £62bn off its value. In the US, the Dow Jones closed down 419 points, or 3.7%, at 10,991.

Growing disarray in the eurozone over the latest bailout for Greece, weak American manufacturing figures and a warning from Wall Street bank Morgan Stanley that the US and Europe are "hovering dangerously close to recession" all contributed to the mood of panic.

A closely watched gauge of the US manufacturing sector produced by the Philadelphia Federal Reserve plunged, underlining fears that the recovery has ground to a halt.

The yield on benchmark 10-year US Treasury bonds, which measures the cost of borrowing for the American government, slipped below 2%, as investors sought a haven from the storm. Gold, which has soared in value this year, hit another new record of $1,825 (£1,106) an ounce.

Sal Catrini, managing director for equities at Cantor Fitzgerald in New York, said: "The market is in meltdown mode; the data continues to stink. I don't know that there's much more to be said."

In Europe, investors were spooked by news that at least five eurozone countries had asked the Greek government to put up collateral against their share of the latest emergency bailout for Athens.

Austria, the Netherlands, Slovenia and Slovakia joined Finland in insisting that the Greeks put up assets as security, before they sign off on the €109bn (£95bn) emergency loan agreed in July. Their demands underline fears that eurozone countries have little confidence in the latest plans to shore up the single currency.

"It does suggest that northern European states have a certain lack of faith in Greece," said Simon Derrick, of the bank BNY Mellon.

Europe's banks also saw their shares fall sharply, despite the ban on short-selling imposed by several countries including France and Germany last week.

It was reported that the European Central Bank has made an emergency short-term loan of $500m to one struggling financial firm; while a story in the Wall Street Journal suggested that European banks with US operations had been hauled in by the New York Federal Reserve and asked whether they had enough capital to survive the market chaos.

In the UK, shares in Royal Bank of Scotland and Barclays were down by 11%, and Lloyds by 9%.

The turmoil came as Andy Haldane, the Bank of England's executive director for financial stability, warned that the fears in financial markets have been exacerbated by the "psychological scarring" from the traumatic events of the past two years.

"Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster," he said, in a paper published by the Bank. He called for "a more optimistic popular narrative" to help counter this ingrained pessimism.

Despite the US Federal Reserve chairman Ben Bernanke's pledge to keep interest rates at rock bottom until 2013, investors are increasingly nervous that central banks have run out of ammunition to rescue the ailing world economy.

"Every time the economy got the sniffles, we had the Federal Reserve standing by with tissues," said Jack Ablin, chief investment officer at Harris Private Bank. "This time around, I think the box is empty, and we're going to have to go through this alone."