More than £93 billion was wiped from the value of the UK’s biggest companies as London’s FTSE 100 suffered its biggest fall since Black Monday in 1987.
As fear swept through global markets and governments rushed to prop up banks across Europe the Footsie slumped 7.8 per cent – its largest one-day percentage decline since the aftermath of Black Monday in October 1987.
The index closed 391.1 points lower at 4589.2 – its lowest close total since October 2004 – as investors were rocked by the latest turmoil in the European banking sector.
But Chancellor Alistair Darling - reportedly considering moves to shore up UK banks with taxpayers’ cash – did little to restore shattered confidence with firm commitments.
He said “all practical options must remain open” for dealing with the crisis, but added that it would be “irresponsible” to give a running commentary on plans.
In London, trading screens turned red after a weekend in which European governments rushed to support failing banks hit by lack of funds.
CMC Markets analyst James Hughes said: “I’ve never seen anything like this. What we are seeing over the last few weeks is a once-in-a-lifetime event.”
The pressure came after German lender Hypo Real Estate became the latest to receive state aid.
Italy’s largest bank, Unicredit, also warned on profits after announcing asset sales and plans to shore up its balance sheet with a 6.6 billion euro (£5.1bn) boost.
Meanwhile, French bank BNP Paribas agreed to buy a majority stake in struggling bank Fortis – which is already part-nationalised.
Elsewhere, Iceland’s stock exchange suspended trading in shares of six major banks as its Government works on an economic rescue plan. Iceland’s Glitnir bank was nationalised last week.
The shockwaves reverberated through global stock markets and in London, investors were unnerved by reports that the Government could take big stakes in banks - effectively part-nationalisation - to strengthen their finances. Halifax Bank of Scotland and Royal Bank of Scotland both slumped 20 per cent, while Barclays lost 15 per cent.
Just a week ago the UK’s benchmark index also fell more than five per cent as markets were stunned by Bradford & Bingley’s nationalisation.
Manoj Ladwa, senior trader at ETX Capital, said: “Black Mondays used to be a once-a-decade event - now they’re coming along more regularly than a London bus.”
Analysts warned that public stakes in banks - while offering some security - could result in existing shareholders being diluted.
The London market was also hit hard by hefty falls from heavily-weighted mining stocks after experts warned that the sector’s earnings could almost halve this year.
Oil prices plunged to an eight-month low below 90 US dollars a barrel at one point amid fears over the impact of a deep recession on demand.
Hargreaves Lansdown’s head of equity analysis Richard Hunter also warned of the wider effects of the money-market freeze paralysing the banking system.
“The very fact that banks are unwilling to lend to each other - on the basis that the other counterparty may not even be in existence at the end of the loan - necessarily means that they will be equally unwilling to lend to companies, or indeed individuals.
“Stability must return to the system first of all, before markets return to anything like their previous levels of activity.”