The UK's biggest companies plunged into the red today as the fall-out from the cash crisis at troubled US investment bank Bear Stearns shook world markets.
London's FTSE 100 Index fell 2% in early trading as investor nerves over the latest signs of the credit crunch sparked the sell-off.
Bear Stearn's bail-out and acquisition by rival JP Morgan Chase also hit Asian markets, with Hong Kong's Hang Seng down 5% and Japan's Nikkei 225 index off 3.7%.
Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon, told BBC Radio 4's Today programme: "It does scare me. I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this.
"I don't think anybody alive has seen events of this seriousness and magnitude affecting the financial markets."
Mr Smith said that, with banks increasingly reluctant to lend to one another, it was becoming more difficult for individuals and businesses on either side of the Atlantic to obtain loans and mortgages.
"The cuts in interest rates are unlikely to have any effect," he warned. "High interest rates didn't cause this problem, so lowering interest rates isn't going to solve it. It is hard to see exactly what tools the authorities do have."
London's biggest fallers were the major banks feared to be most heavily exposed to the credit crunch. Halifax Bank of Scotland plunged more than 11%, followed by Royal Bank of Scotland - down 7% - as concerns over further contagion of the banking system by the crisis in US sub-prime mortgages spread.
Alliance & Leicester and Barclays also fell 6% and 5% respectively in a dramatic opening which saw just two companies - British Energy and Royal Dutch Shell - in positive territory.
Nerves were frayed after Bear Stearns - the latest victim of the turbulence - was bought by rival JP Morgan Chase for a cut-price £236.2 million US dollars (£116.4m) after being forced to seek emergency funding on Friday.
Meanwhile the US Federal Reserve, in a rare Sunday meeting, cut its lending rate to banks to 3.25% from 3.5% and created another short-term loan facility for big investment banks in a bid to ease the pressure.
Oil prices soared to new records near 112 US dollars a barrel as fears over the US economy grew and the US dollar weakened.
The Fed is likely to cut interest rates again at its meeting tomorrow in a bid to kick-start the world's largest economy, which is teetering on the brink of recession.
Bear Stearns - bought for just two dollars a share by its rival - was heavily exposed to the mortgage-backed investments hit by the credit crunch. Two of its hedge funds collapsed in July last year in one of the early signs of the approaching crisis.
Last week rumours of problems at the business swept the market, leading to a cash crunch for the firm. The bank looks after millions of dollars for hedge funds, which began demanding their money back as the rumours grew and the company has no deposit base to fall back on.
The Fed will provide special financing to JP Morgan Chase for the acquisition, JP Morgan Chase said, and fund up to 30 billion dollars of Bear Stearns' riskier assets.
Meanwhile, JP Morgan Chase said it will guarantee all business - such as trading and investment banking - until Bear Stearns' shareholders approve the deal, which is expected to be completed during the second quarter.