£63bn wiped off UK shares as fears of a recession grow

In London, the FTSE 100 index suffered its biggest losses since the year 2000, shedding £63billion as it finished 232.9 points lower at 6038.3.

It was the second day of a wave of panic-selling provoked by fears that banks are sitting on huge losses incurred from the U.S. property market.

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It is feared there will be damaging knock-on effects for the broader economy and the UK housing market, as the global supply of cheap credit dries up.

Experts warn that the market turmoil could snowball into a worldwide economic downturn, bringing down the curtain on the strongest period of global growth since the beginning of the 1970s.

That could force the Bank of England to delay any decision to raise interest rates again, despite having indicated on Wednesday that a increase to six per cent was likely.

The situation was serious enough to merit intervention by Gordon Brown. The Prime Minister insisted yesterday that the UK economy remains sound.

The European Central Bank also waded into the markets by providing billions in emergency credit to big financial institutions for the second day running.

The U.S. Federal Reserve and Australia's state bank have also pumped large sums into the system to give the industry room for manoeuvre, but the Bank of England has so far chosen not to follow their lead, prompting criticism from some experts.

The markets stampede has been provoked by a meltdown in American "sub-prime" mortgages - loans to borrowers with bad credit records.

Billions of dollars of these riskier loans have been repackaged and sold on to investors and pension funds around the world.

But a rash of defaults by hard-pressed American families have left funds sitting on losses that could add up to £50billion, leading some analysts to liken the situation to the Great Depression of the 1930s.

Economist Neville Hill of financial services company Credit Suisse said: "Everyone is very worried in the markets - it looks like a loss of confidence.

"The U.S. markets have been the centre of the storm, but the contagion in money markets has spread to London.

"If this carries on, it could deter the Bank of England from raising rates again - at least for the time being until things settle down."

Howard Archer, of economic analysts Global Insight, said: "This increases the risk that the UK housing market could see a sharp slowdown.

"Smaller bonuses in the City could also have some dampening impact on consumer spending and the housing market in London in particular."