Dow Jones Slump Could Begin to Threaten Global Markets

The US financial markets were on the brink of a record-breaking slump today as Wall Street reacted to signs that the credit crunch is spiraling out of control to threaten the stability of economies around the globe.

As European governments struggled to contain banking failures, the Dow Jones Industrial Average plummeted by 800 points at one stage, exceeding last week's largest ever one-day points drop of 777.

The blue-chip index staged a modest rally during the final hour of trading in New York to close with a fall of 369 points to 9,955. But it was the first time the Dow had fallen below 10,000 since October 2004, with banks and struggling car companies leading the rout.

Analysts at the investment bank Morgan Stanley warned that problems originating in the US financial system were ricocheting around the world: "The recession now threatens to go global, with industrial economies on the brink, and trade and financial shocks threatening the developing world."

As stocks plunged, the US treasury wasted little time in getting its contentious $700bn bail-out of the banking industry under way.

The treasury tonight named a high-ranking official, Neel Kashkari, to head a new office of financial stability and began soliciting for asset managers to help manage the purchase of banks' distressed securities.

In six business days, the Dow has slumped by nearly 11% and prices are 30% below their peak, reached in October 2007.

The Federal Reserve tried to shore up financial stability today by doubling the amount of money available for short-term lending to banks from $300bn to $600bn.

"You're seeing a tremendous amount of nervousness," said Anthony Conroy, head trader at BNY ConvergEx in New York. "People are seeing this crisis go beyond the US – they're realising it's a global crisis."

Investors' concerns about the international financial system were exacerbated by problems afflicting the German mortgage firm Hypo Real Estate. In the US, two major state governments – California and Massachusetts – say they may need loans from the federal government to tide them over.

Tobias Levkovich, chief US market strategist at Citigroup, said there was a volatile market mood as "the credit crisis has deepened and the economic news out of Europe continues to be almost universally bad". But he expressed optimism that stocks were approaching a bottom, pointing to trends in previous recessions, to the ratio of funds' cash holdings and to a "sense of resignation within investor sentiment".

On Wall Street, banks suffered a severe sell-off and there was bad news after the market closed as Bank of America revealed a 68% drop in profits to $1.18bn. The firm said it was embarking on a $10bn fundraising and it halved its dividend payout to shareholders.

"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," said Bank of America's chief executive, Kenneth Lewis.

Struggling car manufacturers were dealt a blow by a warning from Volkswagen which admitted it would miss its target of selling 100,000 vehicles in the US this year. Ford dropped by almost 9% and General Motors by 6%.

"We all had anticipated some degree of economic adversity," Volkswagen's US chief Johan de Nysschen told Bloomberg News. "We didn't imagine the largest one-day drop in the history of mankind."

On a visit to Texas, President George Bush met a group of small business leaders at a soda shop in San Antonio to discuss their personal experiences of the credit crunch. Speaking outside, he warned that the government's bail-out plan would take some time to work even after Friday's approval by Congress, ending a political battle over the policy.

"It's going to take a while to get in place a programme that, one, is effective and, two, doesn't waste taxpayers' money," said Bush. "We don't want to rush into the situation and have the program not be effective."

Wall Street's tumble was part of an international epidemic.

Trading was halted at stockmarkets in Russia, Brazil and Peru."The issues are worldwide," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "People are scared and the only thing they're doing is selling."