Dow Plunges 678 Points

A collapse in the value of the US stockmarket dramatically accelerated Thursday as Wall Street shares plunged to their lowest level for five years driven by urgent, relentless selling on trading floors.

Hit by mounting alarm over the stability of the global financial system, the Dow Jones Industrial Average dived by 678 points to 8,579 in the blue-chip index's third worst points fall of all time. In percentage terms, the Dow fell by 7%, exceeding the damage caused by last week's record one-day slump of 777 points.

It was the seventh consecutive downward day on Wall Street, aggravated by a steady flow of international crises and by a sense of foreboding that the Bush administration's $700bn bail-out of the US banking industry may not work. Bob Doll, head of equities at one of America's biggest investment firms, Blackrock, said the day-by-day tumble in stocks ought to be termed a crash after a 23% fall since the beginning of last week. "I guess we have to call it that – it's been relentless, with not much relief along the way," he said. "The Federal Reserve is going to have to be bigger, bolder and in front of this."

A consensus is setting in that the US is in line for a deep recession. A survey of 52 economists by the Wall Street Journal found that most expected three consecutive quarters of negative growth, with the odds of a recession up from 60% to 89%.

On Wall Street, banks took a hammering as a temporary ban on "short" selling was lifted by US regulators, allowing hedge funds to resume betting on a fall in the stocks of fragile financial institutions. This was in spite of confirmation from the White House that the US treasury is considering following in Britain's footsteps by taking equity stakes in major banks in return for injections of capital. Concern broadened to industrial sectors as America's biggest carmakers, General Motors and Ford, suffered a dramatic sell-off. GM's stock dived by 31% on fear that it could be driven into bankruptcy by banks' reluctance to offer car loans to motorists.

Traders said that there were simply no buyers in the market and that selling was becoming indiscriminate as collapsing hedge funds liquidate their portfolios and private investors cut their losses.

"I think the market's way oversold. But I can't stand in the way of this falling knife — I'd get sliced open," said Phil Orlando, chief equity market strategist at Federated Investors. "Investors are just saying, get me out at any price."

The US sell-off gathered pace after the closure of European markets. In London, the FTSE 100 index had suffered a more modest fall, dropping 1.2% or 52.9 points to 4,318 – its lowest close in four years.

The FTSE 100 has so far fallen by 700 points this week. Banks such as HBOS and Royal Bank of Scotland closed 31% and 6% higher in the wake of the government's rescue package, but Barclays was London's worst-performing blue chip stock, down 13% on speculation that it may look to its shareholders for a capital injection rather than draw on the government's initial £25bn of funds. Wall Street's tumble is likely to mean another highly volatile session for global markets today. The White House said that President Bush will make a statement early today to offer reassurance on the state of the economy.

There has been little sign of any easing on the rigid credit markets where banks, wounded by huge losses on mortgage-related securities, are highly reluctant to lend money. Shares in Morgan Stanley and Merrill Lynch slumped by 25% on concern that they may struggle to survive the credit crisis.

It is a year to the day since Wall Street hit an all-time peak, with the Dow Jones touching 14,279. Since then, the index has lost 40% of its value.

Any comfort provided by Wednesday's co-ordinated cut in interest rates in Europe and the US quickly evaporated. Robert Buckland, global equity strategist at Citigroup, said policymakers were proving unable to get a grip on the crisis. "The escalating financial crisis has battered world equity markets," he said. "The failure of the policy response so far means that the risks of a major global economic downturn are rising by the day."

In London, one professional investment manager who manages a portfolio worth billions of pounds said there were fears that share prices were now being pushed down by "forced solvency sellers" — who have to liquidate holdings to meet demands for cash or regulations that require that shareholdings are sold below certain levels.

"It is unclear who is still selling at these levels," he said. "Short selling is severely restricted and there cannot be any pension fund managers selling at these levels. They would be sitting tight."