Stock markets on both sides of the Atlantic were braced for more turmoil today in the wake of the Lehman Brothers collapse.
The US investment bank, which lost billions in the credit crunch, filed for bankruptcy after weekend rescue efforts foundered.
The news sent London’s benchmark FTSE 100 Index plunging nearly 4% and forced the Bank of England to pump an extra £5 billion into panicked money markets.
Last night Wall Street saw its worst points fall since the 9/11 terror attacks, the Dow Jones index sliding 504.5 points, or 4.4%, as investors reacted badly to the meltdown of Lehman and Merrill Lynch.
Analysts predicted the downward slide would continue today.
Tom Hougaard, chief market strategist with City spread-betting firm City Index, said he expected the pressure on traders to sell to continue unabated.
“We’re going to have more of what we had yesterday,” he said.
“More selling pressures, more falling of banking stocks, more HBOS (Halifax Bank of Scotland) bad news, more more more more more.
“I always look at the last hour of trading, because that’s when the real pros come out. If they were buying, good, but they were all selling.
“We’re on a crash pattern, there’s no doubt about that.”
The FTSE 100 could fall to the 5000 mark, and the Dow Jones as low as 10500, before the low was reached, he warned.
“In this situation it’s very difficult for market players to ascertain what’s good and what’s bad, and as a result you get this wholesale selling,” he said.
“There’s no good news for anyone – it’s bad news all round.”
But the collapse of a big player such as Lehman was often the precursor to the market bottoming out, he added.
“A bear market low is always associated with a big player going out of business,” he said.
“WorldCom, Enron – both of these stories broke shortly before the low.”
The future of around 4,500 UK staff of the 158-year-old bank looked bleak as PriceWaterhouseCoopers were called in as administrators of four UK subsidiaries.
Lehman Brothers now joins nationalised Northern Rock and US rival Bear Stearns - which hit trouble in March – on the casualty list following a year of turmoil.
Fellow US investment bank Merrill Lynch – another victim of heavy losses linked to the US housing market – was also bought today by Bank of America in a deal worth 50 billion US dollars (£28bn).
There were also fears giant US insurer AIG could face collapse. The firm, whose shares nearly halved last week, is taking steps to raise money amid reports it is seeking a 40 billion US dollars emergency loan from the Fed. AIG is the main shirt sponsor of Manchester United Football Club.
PwC said Lehman had “hundreds of billions” in liabilities and could not guarantee the cash to make payments to staff at the end of the week.
Although some employees will be working for the bank for “many months to come” as Lehman’s complex business is unravelled, others will leave the business sooner, administrator Tony Lomas said.
Mr Lomas said the outlook was “uncertain on a number of fronts”, adding that it was a “period of stress and distress” for the group’s staff.
As well as the falls for the Footsie – which was more than 5% down at one point - France’s CAC 40 slid almost 4% while Germany’s Dax fell 3%.