Share prices fall by third in Footsie's worst year

The FTSE-100 suffered its worst year with a 32 per cent slump in the total value of the country's blue chip stocks. The record loss underlined the scale of the economic downturn and analysts warned there was little respite on the horizon.

London's benchmark index plunged to 3714 in October - its lowest point since April 2003 during the Iraq war.

Although shares have since recovered slightly, the Footsie currently stands more than 2060 points lower than its opening mark of 6456.9 for 2008.

This dire performance even surpasses 2002's 25 per cent decline during the dotcom crash. A 32 per cent fall would also be the second biggest annual slide recorded by any British share index. In 1974, the FTSE All-Share lost 55.3 per cent of its value.

The credit crunch, housing market slump and banking crisis have wiped billions of pounds from the value of the Footsie over the past year.

But the financial turmoil took many by surprise, with some making bullish predictions at the start of the year that the FTSE 100 could beat its all-time high to hit 7000 or more in 2008.

David Buik, market commentator at BGC Partners, said: "What happened to the stock market in London in 2008 was that it was all about sentiment rather than lack of achievement.

"If you look at one of the big miners such as Rio Tinto, it was worth £73 in April and £14 now and there is no way either of those prices is right. The biggest drive force was fear and uncertainty - not the fact that the economy is going through the floorboards. A 2.5per cent fall of GDP doesn't mean the end of the world."

Markets crashed from the start of September as the full extent of global bank losses was revealed, confidence collapsed, and lending froze. The collapse of Lehman Brothers on 15 September caused immense damage.

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Not only did the bank's fall lead to losses of billions of pounds but it also meant insurers got caught up in the maelstrom. They had to pay out on complex financial instruments that insured against a hypothetical event - the bankruptcy of a major investment bank - that insurers such as AIG never expected to happen.

As other banks toppled, including the Royal Bank of Scotland and HBOS in Britain and the entire Icelandic banking sector, so the malaise spread across the wider economy.

Investors also moved cash into government bonds, which have been issued at record levels around the world to fund economic stimulus packages.

Jay Mueller, portfolio manager at Wells Capital Management, said: "There has been a global flight to safety into government bonds and everything else has been left behind."

The Stock Market fall has been paralleled by a collapse in the value of the pound - partly fuelled by the increase in government borrowing ordered by Alistair Darling. The pound slumped by 26 per cent against the euro - from 1.36 euros on 1 January to two cents above parity. Sterling also nose-dived by more than a quarter against the dollar - from $2 as recently as the summer to around $1.43 now.

Mr Buik said: "The slump is based on the fact the world believes the UK economy will recover much more slowly than America and Europe."

The oil price closed the year far below its peak. It reached an all-time high of $147 in July - sending inflation soaring - before dropping to just under $40 as the world economy entered recession.

Gold, a safe haven in times of crisis, also hit a record high this year, breaking through $1,000 an ounce on 14March. The price of gold did fall back on hopes of a recovery but has risen from close to $700 to near $900 in the past two months.