Further market decline feared as US rules out fresh stimulus

Hopes that the US would embark on a fresh round of fiscal stimulus to boost its ailing economy were dashed tonight, sparking fresh fears about renewed stock market turmoil.

London's battered shares index dodged its longest losing streak for eight years today because of hopes that the US Federal Reserve would announce a third round of money printing, or quantitative easing (QE).

But the hope proved ill-founded when the Fed warned that growth had been slower than expected and said interest rates will remain at a record low for the next two years.

In the wake of the Fed's announcement, stocks on Wall Street fell, which will cause further concern for UK investors who had been boosted today after the FTSE 100 Index closed up almost 2%.

The rise meant the London market avoided its eighth consecutive day of falls, which would have been its worst run since January 2003.

The FTSE 100 Index has tumbled some 10% in the past two weeks amid panic that the eurozone will be crushed under the weight of its debts and the US will lead the world back into recession.

Eurozone leaders intervened in bond markets to shore up the finances of debt-ridden Italy and Spain earlier this week.

Traders had pinned their hopes on Fed chairman Ben Bernanke taking action to restore confidence after the US was stripped of its AAA credit rating for the first time.

But tonight the Fed said it expects to keep its key interest rate close to zero until mid-2013.

It was downbeat on the prospects for the US economy, saying that so far this year the economy has grown "considerably slower" than expected and it expected "a somewhat slower pace of recovery over coming quarters".

The gloomy outlook led the Dow Jones down more than 1.5%, the S&P was more than 1% lower, and the Nasdaq lost nearly 1%.

Clem Chambers, chief executive of financial website ADVFN, had said that if the Fed announced another round of QE, the "market will rally hugely".

But he warned: "If there is no shock and awe from the Fed, the Dow Jones will roll over and head towards 10,000."

Louise Cooper, an analyst at BGC Partners, warned of a bloodbath on equity markets if the Fed "doesn't come up with something soon".

Traders are terrified that the stock market falls could help push the global economy into recession by destroying consumer confidence, prompting traders to dump more stocks and creating a vicious circle.

Despite today's improvement, the FTSE 100 Index has lost around 900 points in a month and yesterday posted four consecutive sessions of triple-digit losses for the first time in its 27-year history.

Banking shares continued to bear the brunt of the turmoil as investors fretted about their exposure to indebted economies, such as Spain and Italy, and after heavy losses for counterparts in New York last night.

Taxpayer-backed Royal Bank of Scotland was among the FTSE 100 Index's biggest fallers, down 4%, although at one point it had been down 10%.

It has now lost about a quarter of its value in the past two weeks, and at 26.2p per share is about half the British government's break-even point of 51p. Lloyds, which was also bailed out by the UK government, fell 2%.