Stocks dive amid world crash fears

London’s FTSE 100 Index closed 3.4 per cent down – its biggest fall of the year – wiping nearly £50bn from share values.

There was a similar bloodbath on international markets as the Dow Jones index in New York was nearly three per cent lower in early afternoon trading, Frankfurt’s Dax closed more than three per cent lower and the CAC 40 in Paris fell nearly four per cent.

The latest collapse in share prices comes amid rising fears that Italy and Spain, the eurozone’s third and fourth largest economies, may need bailouts.

And widespread worries over the United States’ economic recovery have been fuelled by figures showing a slight rise in the number of people who applied for unemployment benefits.

The plunge in global markets is further bad news for Chancellor George Osborne, who has faced increasing pressure over the pace of Britain’s economic recovery.

The chairman of the Office for Budget Responsibility (OBR), Robert Chote, said the watchdog’s growth forecast of 1.7 per cent – made in March – was likely to be missed.

GDP increased by a lacklustre 0.2 per cent in the second quarter of 2011 after consumers reined in spending.

And UK fears were further heightened by a survey which showed that the manufacturing sector – the main driver of growth in recent months – contracted in July for the first time in two years.

The growth fears led the Bank of England to hold interest rates at their record low of 0.5 per cent yesterday.

The decision to keep rates on hold for the 29th month in a row came after the Bank warned at its meeting last month that the risks posed by a deteriorating European debt crisis were substantial for the UK.

Economists now think rates could remain on hold until well into next year because of the country’s uncertain growth prospects.

The FTSE 100 Index closed down 3.4 per cent, or 191.4 points, at 5393.1 – its biggest daily drop since March 2009.

It follows a fall of 2.3 per cent on Wednesday, which means that £85bn has been wiped off its value in the past two days. It is now at its lowest point for nearly a year.

Gold rose to $1,665 an ounce as investors searched for safe havens.

The pound, which is also being seen as a safe haven, rose to £1.15 against the euro, but fell to £1.63 against the dollar.

The freeze in rates is at least good news for borrowers, with the price of a fixed rate mortgage now at an all-time low.

However, the extended period of lower lending costs spells more misery for pensioners and savers who will continue to suffer low returns on their money, at a time when high inflation is eroding the value of their deposits. Few savers have been able to find banks offering interest rates high enough to offset inflation.

Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, said markets could continue to fall, particularly if closely-watched jobs data from the US today revealed a further slowdown in the economy.

He said: “Investors are pessimistic at the moment. The general market mood is to try to prepare for the worst.

“It’s difficult to see anything positive coming from the data tomorrow unless they reveal absolutely barnstorming figures.”

A Treasury spokesman said: “This is a time of uncertainty in the international economy.

“Because of our difficult decisions to reduce the deficit and tackle our debts, Britain has been stable during this time.

“The economy is growing and creating jobs.”

It is understood that the Government is monitoring the global markets closely and the Chancellor is receiving regular updates.