London shares tumbled today hitting their lowest level for almost three years as the City became convinced that the UK economy can no longer avoid recession.

The FTSE 100 fell 107.9 points to 5404.8, crashing through its lowest point this year and hitting a level not seen since November 2005.

Housebuilding and banking shares were once again the hardest hit.

Plunging share prices leave two of the biggest outstanding fund raising efforts from the banks, HBOS's £4 billion right issue and Bradford & Bingley's bungled £400 million issue, looking increasingly certain to be left with City underwriters.

B&B's shares plunged to new lows, down 12p to 30p.

London is now within a whisker of moving into a bear market with the FTSE trading 18.5% lower than it was 12 months ago.

All the major European markets fell today with Paris and Frankfurt both down by more than 2%.

Last week Wall Street officially entered a bear market. That is defined as being when a stock market index has fallen by 20% or more from its peak over at least two months.

London flirted with entering its own bear market phase last week but pulled back from the brink.

As measured by the leading share index the FTSE 100, London's most recent peak was 6730.7, hit in October last year. That means a bear market begins when the index falls below 5384.6 which is less than 0.4% lower than today's level.

The slide came as the British Chambers of Commerce warned the UK was now on the brink of recession following a "menacing deterioration" in the health of the economy. David Kern, economics adviser to the chambers, said: "We are now facing serious risks of recession. The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."

The stark warning followed further grim news on the housing market and the collapse of the key services and manufacturing sectors of the economy. Experts also warned the Government is facing a multi-billion pound shortfall in its finances because of the economic downturn.

A report by the National Institute of Economic and Social Research said the slowdown will cut at least £8 billion from the tax revenues Chancellor Alistair Darling forecast in his March Budget.

The Government has already compromised its borrowing targets with its £2.7 billion handout to those worst affected by the 10p tax debacle while revenues from stamp duty are falling because fewer houses are being bought and VAT receipts are in decline as food, which is free of VAT, is taking up a larger share of spending.