Markets slide as US troubles add to the euro's woes

Trading screens turned red as sovereign debt fears mounted and Berlin's shock move to clamp down on short-selling in Germany triggered talk of a Europe-wide ban.

The gloom deepened when figures showed an unexpected rise in unemployment in the US as the world's largest economy struggles out of recession.

The FTSE 100 dropped closed down 80.17 at 5077.91 in London meaning it has now lost 13% of its value, or nearly £200 billion, since hitting a 2010 high of 5825.01 last month.

Shares in Europe and America were also on the slide with the CAC-40 down 2.5% in Paris, the DAX off 2% in Frankfurt, and the Dow down 215 at 10229.

On the currency markets, the pound dived 1.18 cents to $1.4326 and the euro fell 0.49 cents to $1.2366 as Greek workers went on strike in protest at savage spending cuts and tax rises imposed to tackle its mounting debts.

Analysts and politicians blamed the latest sell-off on German Chancellor Angela Merkel whose surprise ban on short-selling outraged other European leaders and knocked confidence in financial markets.

Gary Jenkins, head of credit strategy at Evolution Securities in London, said: "It looks as if at the top of the European Union there is a complete division about how to deal with this crisis and at a time of stress you need unity."

The Chancellor, George Osborne, said: "I don't think the euro is in danger but it's very important that all members of the EU and members of the eurozone constantly work together so that we deal with the real problems in many European states which is the size of the budget deficit."

French economy minister Christine Lagarde said: "I absolutely do not think that the euro is in danger. The euro is a solid and credible currency."

Jean-Claude Juncker, president of the Eurogroup, said fears about the eurozone were overplayed by speculators. He said: "I don't think the markets are behaving in a rational way."

Analysts warned the euro had further to fall and could hit parity with the dollar in coming months. "The euro is undergoing a crisis of confidence and it's difficult to see what might reverse that trend," said Lee Hardman at Bank of Tokyo Mitsubishi in London.

The euro has fallen 14% against the dollar this year. It hit an all-time low of $0.8272 in October 2000 and a high of $1.6038 in July 2008.

Greece and Spain have promised tough austerity measures to reduce their deficits. The EU and IMF have also launched a 750 billion rescue fund to help stabilise the markets.

But Merkel's decision to ban short-selling on euro bonds and leading financial stocks in Germany smacked of panic and triggered fears deeper problems lie ahead.

Merkel called today for a co-ordinated approach across Europe to end bailout measures for struggling economies. She said she would push for a tax on financial markets at the G20 meeting in Canada next month.

"The issue of exit stratgies is of great importance to us. Quite frankly I am quite concerned about this issue," she told a financial conference.

"Others say I can only have an exit strategy as soon as I have reduced the ununemployment rate, that is contradictory. We will focus on a co-ordinated exit strategy in Europe."