Oil prices in sharpest fall since Desert Storm as 'incredible' panic grips US banks

The oil price continued its slide today amid deepening worries about the state of the US economy.

After crashing $10 a barrel at one stage last night, it slipped a further dollar this morning to $137.74 for New York crude.

Yesterday's fall was the sharpest since 1991, when prices crashed at the start of Operation Desert Storm in Iraq.

Fears for the future of America's banking system battered the oil price last night as investors finally lost faith in the world's biggest economy. If demand for fuel by US industries and motorists deteriorates, the crude price will fall further.

It would tumble even faster if a slowing US economy dragged down the current rapid growth in developing countries such as China and India.

"If a recession happens in the US, and if it's a bad one, it could have an impact on the whole world, and that is the fear," said Anthony Nunan, risk manager at Mitsubishi Corp.

Conversely, a falling oil price should be good for the US economy  -  a factor that lifted the Dow Jones Industrial Average off its lows last night, and today helped give some succour to the dollar, which bounced back slightly from yesterday's record low against the euro.

Shares in London and Asia paused for breath after yesterday's dramatic falls, with the FTSE-100 up 30 points at 5201.9 although shares in oil companies fell.

Chief among bankers' and traders' fears today is a potential wave of bank failures, from the biggest Wall Street investment banks down to the smallest regional savings and loan companies.

Brad Hintz, a senior Wall Street analyst at independent asset management firm Sanford Bernstein, said fears another big bank will go under any day are intensifying.

"I got a call this week from a partner at a major Wall Street brokerage, I won't say which one, and he was literally in the bathroom. I could hear the toilets flushing.

"In all seriousness, he called me to ask me if I thought his firm, where he is a partner, is going to survive," Hintz said. "I find that kind of panic incredible."

So far Bear Stearns, formerly one of the big five investment banks on Wall Street, has collapsed while Californian mortgage provider and High Street bank IndyMac was closed down last week.

Now there are fears Lehman Brothers, another big Wall Street bank, may be next to go under, while US regulators have drawn up a list of at least 90 banks that are said to be in a critical condition.

Tensions surrounding the failure of bank IndyMac were so high yesterday that police  ordered angry customers lined up outside a branch to remain calm or face arrest.

The threat came as customers they tried to pull their money on the second day of the institution's federal takeover.

At least three police squad cars showed up early Tuesday as tensions rose outside the San Fernando Valley branch of Pasadena-based IndyMac Bank.

Federal regulators seized IndyMac on Friday and reopened the bank Monday under the control of the Federal Deposit Insurance Corporation. Deposits to $100,000 are fully insured by the FDIC.

Worried customers with deposits in excess of insured limits flooded IndyMac Bank branches on Monday, demanding to withdraw as much money as they could or get answers about the fate of their funds

The expected bloodbath in the banking sector is the latest fallout from America's housing-market collapse and the credit crunch, which have been pummelling the US economy for the past 11 months.

As banking and brokerage shares took big losses on Wall Street yesterday, the Dow Jones Industrial Average suffered a pounding, closing below the psychologically important 11,000 mark for the first time in two years.

The stock market was weakened further as Federal Reserve chairman Ben Bernanke said economic growth and inflation were both a problem. His comments also hit the dollar, which sank to record lows against the euro and pound.

Meanwhile, the US stock market regulator has extended its probe into suspected manipulation of shares in Lehman Brothers and Bear Stearns by sending subpoenas to top brokerages including Goldman Sachs, Deutsche Bank and Merrill Lynch, Bloomberg reported.