Investors sent global shares plummeting yesterday as fresh fears over the extent of the worldwide credit crunch and weak US data combined with soaring oil prices to spread jitters across financial markets.

The US Federal Reserve was forced to pump $41 billion (£19.7 billion) into the financial system, the largest cash infusion since the September 2001 terrorist attacks, as fears of a fresh round of massive banking writedowns added to concerns on Wall Street and in London.

Economists said that a clear signal from the Fed that its quarter-point rate cut on Wednesday may be the last for some months added to investors’ fears that the central bank’s scope to fend off a severe US slowdown may be hampered by its nagging worries over inflation dangers.

David Fineberg, a senior dealer for CMC Markets, the spread-better, sounded a warning that “investors have a lot to be worried about” as fears of further bad news over the credit squeeze sent shares tumbling on both sides of the Atlantic in the steepest losses since the August peak of present market upheavals.

On Wall Street the Dow Jones industrial average tumbled 362.10 points to end the day at 13,567.90. Earlier in London the FTSE 100 index lost 2 per cent, or 135.5 points, to close at 6,586.1, with banking stocks contributing 40 points to its decline.

Mr Fineberg said: “Most banks have explained their exposures but the worry is that they’ve undervalued those exposures. People are also interested in how the credit crisis will affect other sectors, how a slowdown will hit the housebuilders and retailers.”

Brad Hintz, a banking analyst for Sanford C Bernstein, gave warning that so-called structured investment vehicles (SIVs) – funds affiliated to Wall Street banks – represented the “Sword of Damocles hanging over the credit market and the broader economy”. These funds pose a significant threat to the economy because they hold about $350 billion of assets, much of it invested in high-risk sub-prime mortgages, which they are being forced to offload into a declining market.

Mr Hintz said: “If the SIVs flood the market with CDOs [pools of mortgage bonds], it will drive down prices and accelerate the credit crunch. If the banks absorb these losses on their balance sheets, they will have less money to lend out and the economy will suffer.”

Citigroup’s shares closed down by $2.85, or 6.89 per cent, at $38.51 after three analysts cut their rating on the bank and CIBC issued a note giving warning that it may have to reduce its dividend to shore up its balance sheet. The decline in the bank’s shares added to the toll on US markets yesterday.

CIBC’s note fuelled investor concerns that the worst of the fallout from the credit crunch may still be ahead, coming hard on the heels of analyst predictions that both Merrill Lynch and Citigroup face multibillion-dollar writedowns this quarter, despite writing off $8.4 billion and $6.5 billion, respectively, in the third quarter.

UBS shares fell by as much as 6 per cent yesterday after Merrill Lynch said that the Swiss bank faced a further $8 billion of writedowns on its mortgage-related investment portfolio. In the UK, Libor interest rates for three-month lending between banks rose for a third day in a row, indicating that banks are increasingly reluctant to lend to one another. Libor hit a 2½week low on Monday of 6.26750 per cent, but by yesterday rebounded to 6.28375 per cent.

The price of oil, which stood at $80 a barrel as recently as October 10, exceeded $96 in New York for the first time yesterday, putting further pressure on the price of petrol and other energy costs and reducing consumers’ spending power. Markets were further unnerved by fresh data from the Institute for Supply Management, which revealed that US manufacturing came close to stalling last month.

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