Warning of financial meltdown as shares plunge

With stock markets slumping worldwide and speculation over the next bank to be brought to its knees, senior City figures described the outlook as the worst since the 1929 Wall Street Crash.

In an emergency statement following the collapse and rescue of US investment bank Bear Stearns, Mr Bush said: "The United States is on top of the situation. We've taken strong and decisive action. The Federal Reserve has moved quickly to bring order to the financial market."

The Fed is expected to cut rates sharply again tomorrow to boost growth.

Mr Bush acknowledged the authorities were dealing with "a difficult situation", but said the world economy would emerge intact.

The President's comments came during one of the most traumatic days on the markets in living memory and were not enough to steady the Dow Jones Index, which fell 111 points to 11,889.3

The London stock market also plummeted and, at one stage, the FTSE-100 index fell more than 200 points. It later recovered to stand at 5520.7, down 111 points by mid-afternoon. Bank shares were the worst hit with RBS down 16.75p at 317p and Barclays falling 29p to 404p.

The rescue of Bear Stearns over the weekend led to a near freezing of the money markets as panicked traders looked for the next victim of the crisis.

Rumours swept through Wall Street that another major investment banking name was in trouble with shares in the giant Lehman Brothers group collapsing by a third.

It is due to reveal its first quarter profits tomorrow.

Banking expert Sandy Chen of City stockbroker Panmure Gordon said the "severity of this current crisis" was "a clear indicator that other firms may be vulnerable".

Bear Stearns was bought by JP Morgan for just $2 a share yesterday - a massive discount on the $169 the shares hit in January last year.

Julian Jessop, chief international economist at Capital Economics, said: "The very low price paid suggests that the problems at the brokerage were even bigger than previously thought."

Despite the Bank of England injecting £5 billion into the London money markets, the interest rate at which banks lend to each other spiked to almost six per cent, way above the official Bank of England rate of 5.25 per cent.

David Buik, of City bookmakers Cantor Index BGC partners and one of the Square Mile's most respected "elder statesmen", said: "No one in living memory has ever seen a banking crisis like this since 1929. I am older than God and have worked in the Square Mile for 46 years and the outlook has never looked as bleak."

Veteran trader Terry Smith, chief executive of specialist City broker Tullett Prebon, said: "It does scare me. I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this. I don't think anybody alive has seen events of this seriousness and magnitude affecting the financial markets."

Jim Reid of Deutsche Bank said: "Even though we believe that pain should be felt after such an unruly credit binge, we also think we are close to a financial system meltdown.

The dollar plunged to new lows against the euro and Swiss franc and fell below 96 yen for the first time in 12 years.

This pushed oil to a new record above $111 a barrel today while gold hit a record of $1,032.70 an o u nce as investors rushed to "safe havens". US crude for April delivery was up 95 cents at $111.16 a barrel and May London Brent crude was 55 cents higher at $106.75. Gordon Brown tonight attempted to calm the roiling markets by saying the British economy was robust.

But he added: "While our economy is resilient and the fundamentals strong, we will at all times remain vigilant and - particularly at this time of global uncertainty - will continue to take whatever action is necessary to maintain economic stability."