Share markets plummet as fear returns

European and US shares have seen more large falls, as the uncertainty that has caused recent turmoil returns.

London's FTSE 100 index ended the day down 4.5%, while Germany's Dax lost 5.8%. Shares failed to recover in US trading, with the Dow ending 3.7% down.

Shares in some leading banks plummeted, with Barclays and Royal Bank of Scotland down more than 11%.

Analysts again cited reasons including worries about global growth and the eurozone debt crisis.

"People are nervous about the outlook for the global economy," Grant Lewis, head of economic research at Daiwa Capital Markets in London, told the BBC.

"Every piece of economic data that has come out recently has been weaker than expected."


Worried investors deserted riskier assets and sought out havens for their cash.

The spot price of gold hit yet another record high of just below $1,829 an ounce.

The Swiss franc rose 1% against the euro, despite recent attempts by the Swiss authorities to weaken it, before falling back later.

Some government bond prices also rose sharply, causing their yields - their implied cost of borrowing - to plummet to historic lows.

The 10-year US treasury yield briefly dipped below 2% to its lowest level since the Second World War.

The 10-year German bond yield fell to a post-war low, while the 10-year UK gilt hit an all-time low of 2.235%.

Analysts said the falling bond yields reflected not only their role as a safe investment, but also expectations of prolonged low growth and inflation in the Western world, akin to Japan's experience over the last 20 years.

Bank fears

Markets were also concerned about the exposure of European banks to that eurozone debt crisis.

A report in the Wall Street Journal said that the Federal Reserve Bank of New York had asked for more information about whether the US bank units of big European lenders have reliable access to funds needed to operate.

However, the New York Fed's president, William Dudley, played down the report: "It's really important to stress that we're not focusing on foreign banks any more than... US banks."

Short-term dollar borrowing costs for eurozone banks have tripled in the last month, and on Wednesday the European Central Bank lent dollars to an unnamed eurozone bank, the first of its kind since February.

In the UK, Lloyds Banking Group also suffered sharp falls, down 9.3%, while HSBC Holdings lost 6%.

Shares in Barclays, RBS and Lloyds have now lost almost half of their value in the past six months.

In Germany Commerzbank ended the day down 10.4%.

Societe Generale lost 12.3%, one of a number of french banks to fall heavily, despite a new ban on speculators short-selling their stocks.

This is designed to stop traders betting that shares will fall, which can drive down values further.

'Talk, not action'

On Wall Street, Bank of America was one of the biggest fallers, losing 5.8%.

US investment analyst Jack de Gan, chief investment officer at Harbor Advisory, said all eyes were on the European banking system.

He added: "If there's stress in major European banks, it will affect US banks too."

US investor sentiment was also hit by a huge drop in a closely watched guide to manufacturing activity in the mid-Atlantic states, which analysts said pointed towards a new recession.

Other unexpected US data showed that house sales fell in July, while the number of people claiming unemployment benefit ticked up last week.

This was the second day of big falls for some bank shares.

Wednesday's sell-off had come after a meeting of German Chancellor Angela Merkel and French President Nicolas Sarkozy seen by traders as another missed opportunity to tackle the euro debt crisis.

"What we need is the likes of Angela Merkel and Nicolas Sarkozy to come up with some ways to fight these problems but they met again this week and all we got was talk again. What we need is action," market analyst James Hughes from Alpari UK told BBC News.

The two leaders called for "true economic governance" for the eurozone in response to the debt crisis, including a requirement for balanced government budgets to be enshrined in constitutional law.

Government austerity in the US and Europe is seen by some analysts as compounding a problem of low economic demand.

"[Global] austerity is not helpful at this moment," said Daiwa's Grant Lewis.

"The world is facing a shortfall of private demand, so you'd hope you could make that up with additional public [sector] demand."

Investment bank Morgan Stanley cut its growth forecast for the US and Europe, saying the two were "dangerously close to recession", and criticising "recent policy errors" including the European response to the debt crisis and the US debt ceiling stand-off.

Virginie Maisonneuve, head of global and international equities at Schroders Investment Management, told the BBC: "The essential point is the lack of confidence in the future, so companies are holding back on hiring.

"We are going to continue to see a lot of volatility but we need to see strong leadership and this is what we are missing, from the US and from Europe."