Share prices across the world skidded lower as investors reacted to more bad news linked to the US housing market, with no end in sight to the turmoil that has gripped financial markets for the last week.
"It's been a pretty horrible day. Some very decent stocks have just been sold off wholesale simply to raise liquidity," said analyst Tom Hougaard, chief market strategist at London spread-betting group City Index.
"It really does feel like capitulation selling." In the US, the leading Dow Jones Industrial Average index fell to about 12,600 points, marking a 10-percent decline from a record high struck just a month ago.
Around midday, the Dow was down 1.72 percent, the tech-rich Nasdaq down 2.03 percent, while the broad-market Standard & Poor's 500 index lost 1.79 percent.
In London, the FTSE 100 index of leading shares closed down 4.10 percent at 5,858.90 points, its lowest closing level since September 25 and its biggest fall since March 12, 2003, shortly before the outbreak of the Iraq war.
The biggest fall before this was after September 11, when the FTSE lost 5.72 percent.
The Paris market shed 3.26 percent, the Frankfurt Dax fell 2.36 percent, while other markets across Europe fell by 2.0-4.0 percent. In Asia, Seoul shares closed down 7.0 percent and there were also steep falls in Tokyo and Hong Kong.
Problems with high-risk subprime housing loans in the United States are encouraging investors to pull money out of assets they perceive as risky - such as oil and shares - in favour of safer government bonds. Credit Suisse analyst Jonathan Wilmot said world stock markets could be facing a "correction" - a temporary slide in share prices caused by investors reassessing risk - but added that the outlook was unclear.
"Today is the day which could mark the watershed between a 'healthy' correction to riskier assets and something far more sinister which could lead to real economic distress," Wilmot said. Wall Street investors woke up to a double dose of bad news tied to the housing market.
The US government reported that new home construction dived to a 10-year low in July, and Countrywide Financial - America's leading mortgage lender - said it had tapped an 11.5-billion-dollar credit line to boost its finances.
Shares in Countrywide plunged 14.98 percent to 18.10 dollars in morning trading in New York as investors panicked over the latest sign that the crisis was widening.
Investors are worried about a global credit crunch as more and more banks and investment funds around the world reveal their exposure to the slumping US housing market. Many have made bad investments linked to subprime housing loans - loans to people with poor credit histories - and now face huge losses because of defaults by US borrowers.
The fear is that banks will suspend normal lending practices as they move to cover their losses, thereby restricting access to credit for investors and companies. "We have seen pressure on global markets as analysts are finding it difficult to calculate the extent of the losses involved," Barclays Capital analyst Henk Potts said.
He added: "Until analysts have a much better understanding of the losses and their potential impact the volatility will remain. "One thing markets don't like is uncertainty and it is the uncertainty which is causing the volatility.