Good times are over for the UK as stock markets around the world plummet amid fears over the U.S. economy

They also produced a dire warning from a key member of the Bank of England's monetary policy committee, which sets interest rates.

Andrew Sentance said there are strong parallels between the current situation and the 1970s. He cautioned that 'it will require a squeeze on spending and incomes in the UK and other economies' to rid the world of the inflationary pressures.

Share prices plunging: A broker works behind his computer screens at the stock exchange in Frankfurt as the market tanks

In a speech, he said the good times are over for Britain as the country enters a 'significant' slowdown in economic growth.

He said: 'In the face of the current oil and commodity price pressures, we cannot expect to sustain the benign world of steady growth and consistently low inflation that has characterised the last decade and a half across manydeveloped economies, including the UK.'

Labour found itself under pressure from the Tories and mortgage lenders to take early action to lift the gloom and prevent the economy drifting towards slump.

David Cameron asked the Government to announce an economic recovery plan to help deal with the credit crunch. He urged Alistair Darling to introduce his planned £50,000 insurance scheme for bank depositors as soon as possible.

So far, the Chancellor has declined to accept that there is an immediate economic emergency. Instead, he is promising reforms of the banking system and some relief for motorists and perhaps first-time buyers in his Pre-Budget Report, normally delivered in October.

Struggling: The sign outside Freddie Mac headquarters in McLean, Virginia (top) and Fannie Mae headquarters in Washington DC (bottom)

Mr Darling warned: 'We cannot allow inflationary wage increases. That would mean that everyone, especially people on lower incomes, would suffer.'

The Council of Mortgage Lenders, representing bank and building society lenders, issued a plea for the Bank of England to widen its assistance to the banking system by offering to exchange cash for new mortgages.

It was another dire day for share prices in London with the FTSE-100 index falling 128.5 points to 5,171.9. The slide followed a two per cent drop in Tokyo.

Shares in all the major banks fell back dramatically due to fears that the half-hearted rescue of the ailing American mortgage lenders Fannie Mae and Freddie Mac could signal a second round of credit crunch losses.

In New York, the Dow Jones index continued its slide, closing 92.65 points down at 10,962.54.