Markets Slide in Us and Europe As Gloomy Figures Crowd in

Stocks on both sides of the Atlantic plummeted yesterday as dismal US unemployment figures and a tightening in liquidity by Europe's central bank heightened alarm about the perilous condition of the global economy.

On Wall Street, the Dow Jones industrial average was down 325 points to 11,206 by lunchtime in a broad-ranging sell-off that marked the index's fourth consecutive day of decline - its longest losing streak since January.

The mood on trading floors was darkened by an unexpected jump of 15,000 in the weekly number of new applications for unemployment benefit in the US, plus a report from consultants ADP Employer Services that revealed a cut of 33,000 jobs by private employers during August.

In London, the FTSE 100 of blue chip shares ended 137.6 points lower at 5362.1 after heavyweight banking shares were particularly hard hit by a decision by the European Central Bank to make it tougher for banks to tap its funds for extra liquidity. The French Cac-40 index lost around 3% after the ECB's announcement.

The British banks to suffer included HBOS, which fell nearly 7% to 282.5p, while Barclays was down 6% at 329.25p. Other sectors were also hit by wider economic woes as Marks & Spencer shares fell more than 5% over worries about its trading prospects.

Major indices in the US dropped back into official "bear market" territory - generally defined as a drop of 20% below their 12-month peak. The technology-dominated Nasdaq index fell 59 to 2,274 while the broader Standard & Poor's 500 basket slipped 30 to 1,244.

"We're seeing nothing but sellers," said Ted Oberhaus, director of equity trading at the investment firm Lord, Abbett & Co. "In a bear market you don't really need an excuse to sell."

A steady drip feed of gloomy news has harmed hopes of a swift recovery from the global credit crunch, and a glut of trading statements from retailers in the US gave little cause for optimism. Leading chains such as Target, CostCo, Gap and Abercrombie & Fitch all revealed falls in like-for-like sales in August, although the world's biggest retailer, Wal-Mart, bucked the trend with a 3% increase excluding fuel.

"If you look at the data we have on the US and global economy, things are only getting worse," Diane Garnick, a strategist at Invesco in New York, told Bloomberg News. "That leads me to believe that demand is going to slow down and slow down pretty quickly."

Official monthly US government unemployment figures are due out today and are likely to be closely scrutinized. Wall Street was heading yesterday for its worst four-day fall for nearly three months.

The ECB's move follows concerns that its system to help unfreeze the credit markets had been open to misuse. As a result it is increasing the price it is charging for banks to use toxic mortgage-backed securities for more liquid funds from next February. Instead of receiving €98 for €100 of assets, banks will receive €83.60 in some instances under the new rules.

The ECB's liquidity package - brought in a year ago when the credit crunch started to bite - was being widely used by banks in Europe and is said to have allowed some banks to adjust to the harsher economic realities. The ECB's president, Jean-Claude Trichet, said the changes aimed to improve risk control. "We don't think it will impair the way the system is functioning and the capacity of the banks to go to our operations," Trichet said.

The ECB announced changes to its liquidity package at a time when British banks are preparing for the Bank of England's special liquidity scheme - introduced in April in an attempt to help make it easier for banks to raise financing - to close, in mid-October.

The market turmoil also came along with a warning that a fully fledged global recession appeared "unavoidable" without strong and internationally coordinated action on macroeconomic policy.

In its annual trade and development report, the UN Conference on Trade and Development (Unctad) said the global economy was "teetering on the brink of recession" because of the fallout from the financial crisis in the US, the bursting of the housing bubbles in large economies, soaring commodity prices, increasingly restrictive monetary policies and stockmarket volatility. Unctad expects the pace of world output to fall to about 3% in 2008 - almost one percentage point less than in the past two years.

The report also said that there was mounting evidence that developing countries, which up until now have remained resilient in the midst of the credit crunch, "cannot escape the global slowdown".