Shares dive as traders fear recovery has stalled

The FTSE 100 index was down 77.43 points to 4636.54 in London and the Dow Jones Industrial Average sank 173.21 to 9143.05 in New York.

Sterling also tanked as City bears ramped up pressure on the UK currency following the Bank of ­England's decision to flood the ­shrinking economy with yet more newly printed cash.

The pound dived a whopping 2.52 cents against the US dollar to $1.6294. It was trading at $1.70 before the Bank extended its programme of quantitative easing by £50 billion to £175 billion 11 days ago.

Markets have rallied strongly in recent months on hopes that recovery from the worst recession since the Second World War is just around the corner.

But tonight's carnage in London and New York was mirrored in Europe and followed a nasty sell-off in Asia this morning as optimism faded.

Arifa Sheikh-Usmani, a trader at Spreadex, said: "Markets still feel that any potential upturn in the global economy will be short-term."

Eric Green, director of research at Penn Capital in Philadelphia, said: "This is a healthy correction from what was basically a straight-up market. There's a lot of negativity still out there."

A grim report showing consumer confidence remains weak in the US aggravated doubts about the strength of the recovery in the global economy and overshadowed news that Japan has climbed out of recession.

David Jones, chief market strategist at IG Index, said: "It is a wall of red for blue-chip stocks. The news Japan has come out of recession has not been enough to lift markets."

He said sterling was on the slide again as investors continued to react to the Bank's shock decision to pump even more new money into the economy.

The move, on 6 August, triggered a slump in sterling which renewed its fall six days later when Bank Governor Mervyn King warned "recovery could be slow and protracted" in the UK.

He said the recession "appears to have been deeper than previously thought" and it was "more likely than not" that inflation will fall below 1%.

The warning, and the fresh injection of central bank money, was taken as a sign that interest rates will remain at 0.5% for some time yet.

It also led many in the City to think the Bank favours a weak currency, prompting a series of downbeat forecasts today. "I'm super-bearish on the pound," said Hans-Guenter Redeker, the London-based head of foreign exchange at BNP Paribas. "The Bank of England has made it clear it can't afford a stronger currency." He forecast the pound would fall to $1.50 in 12 months.

John Taylor, chief executive of New York hedge fund FX Concepts, said sterling will "get crushed" and sink as low as $1.45. "It's a race for the least ugly of the candidates," he said, "and I would argue that the US is going to be the least ugly for a while."

Others were more upbeat and said the ­measures taken by the Bank and the Government to ease the slowdown will boost sterling. HSBC predicted the pound would rise to $1.75 by the end of next year — midway between the high of $2.12 in November 2007 and the low of $1.38 in March this year.