A cash crisis at US investment bank Bear Stearns has created fresh turmoil in the markets and marked a dramatic end to the week's trading.
The bank revealed that it had hit liquidity problems and been forced into an emergency funding bailout from fellow investment bank JP Morgan Chase and the US Federal Reserve for an initial period of up to 28 days.
The move immediately sparked fears of a US-style Northern Rock crisis and rekindled concerns that the credit crunch was far from being over. The news sparked a sell-off in US markets with Bear Stearns claiming it had been a victim of "market chatter".
In London, the market followed Wall Street into decline with gains from earlier in the day being wiped out. The FTSE eventually closed one per cent – or 60.7 points – down at 5631.7.
Banks were amongst the major victims, with Halifax Bank of Scotland the worst performer. HBOS was down six per cent, Barclays fell 17.75p at 433p, while Royal Bank of Scotland lost 8.5p to 333.75p.
US stocks also fell sharply amid fears there could be further victims of the crisis.
Chief executive Alan Schwartz said: "Bear Stearns has been the subject of a multitude of market rumours regarding our liquidity."
The bank, which has 14,000 staff and a base in London, said it was in talks with JP Morgan over "permanent financing or other alternatives" – likely to include a takeover.
But it gave no guarantees that any alternatives for the business would be successful.
Richard Hunter, head of equities at stockbroker Hargreaves Lansdown, said the news would hit already fragile confidence in the banking sector.
He said: "Clearly this is not going to help. A number of US investment banks are reporting first-quarter earnings next week and this is another thing that adds to the misery.
"Bear Stearns is not a massive company but it is well-known and big enough to cause concerns.
"It pours petrol on the fire when sentiment was pretty weak anyway, and it’s an example of banks being far less willing to deal with each other."
Meanwhile, Sir Philip Green, billionaire owner of the Bhs and the Arcadia fashion group, did little to calm fears in the retail sector, warning that it faced a torrid 2008.
He said that with retail sales so unpredictable and companies so difficult to value he would be steering clear of acquisition activity. He described current trading as "horrible", predicted profit warnings from his major quoted retail rivals in the next few months and said the 180-store Bhs business would see year to March 31 operating profit fall from the previous period's £50 million.
"I genuinely don't believe there's any retailer in the UK at the moment that will give you a predictable view of the next three, six, nine months of the revenue line. I just don't think they can, it's too volatile," he said.
The entrepreneur said investors should not underestimate just how tough 2008 was going to be.
"You haven't seen a major consumer business with a profit warning [yet]. Now maybe one's coming," he said.
He said the position last April, when there was a spring heatwave and clothing retailers enjoyed double digit underlying sales growth, made comparatives very tough.
He added that Wednesday's Budget was "equally unhelpful".
Mr Green will report Bhs' year to the end of March results and Arcadia's year to end of August figures in October. Although he expects a fall in profits at Bhs, he anticipates the business will be debt free, excluding a £30 million overdraft. Mr Green, aged 56, acquired Bhs for £200 million in 2000 and purchased Arcadia, which owns seven high street fashion brands – TopShop, TopMan, Burton, Wallis, Dorothy Perkins, Evans and Miss Selfridge, trading from over 2,500 outlets – for £850 million in 2002.