The dollar tanked today and London plunged deeper into the bear market on growing concerns over the state of the global economy.

The greenback fell to a three-andahalf month low against the pound and to a record low against the euro as deteriorating confidence in US mortgage giants Fannie Mae and Freddie Mac spooked the markets.

Sterling was also bolstered by shocking inflation figures in Britain of 3.8% for June - higher than the 3.6% expected by economists and all-but ruling out a cut in interest rates any time soon.

The FTSE 100 index slumped 123.0 points to 5177.4, with banking stocks hammered in the carnage. It is now 23% off its most recent peak in October last year, leaving it well in bear-market territory.

"It feels very uncomfortable out there," said David Buik of BGC Partners in Canary Wharf. "Fear and uncertainty are toxic."

The sell-off was echoed across Europe and in Asia, where banks in Japan, Taiwan and South Korea admitted they held more than $65 billion (£33 billion) of debt issued by Fannie and Freddie. Shares in the region plunged to their lowest since October 1996 amid the clearest signs yet of global contagion from the crisis.

The bloodbath came as the White House looked increasingly powerless to shore up confidence in the US economy despite its pledge to bail out Fannie and Freddie, firms that oil the wheels of the US mortgage industry. Their shares both tumbled by 11%today.

The greenback fell to 2.0114 against the pound and 1.6038 against euro - its lowest since the currency was introduced on the Continent in 1999 - before recovering slightly.

James Hughes of CMC Markets said: "Traders continue to fall out of favour with the dollar, looking for safer currencies instead. Sunday's announcement regarding the mortgage bailout plan for Fannie and Freddie remains somewhat derided in the market. It has apparently done little more than underline the perilous state of the US economy."

America today woke up to images of its own Northern Rock. Depositors queued around the block to take their money out of the IndyMac bank. The collapsed bank was shut and taken over on Friday and reopened yesterday under Government control.

That has fuelled concern about the wider banking industry. William Gross at Pimco said there was real fear about a host of collapses of smaller banks. "The market wonders which institution is too small to bail out. Where is the dividing line?" he said.

US bank Wachovia was set for a fresh sell-off today after a downgrade on Wall Street. Billionaire investor George Soros, 77, said it was "the most serious financial crisis of our lifetime".