Some of the most influential UK fund managers sounded a warning of more turmoil to come yesterday as global investors fled financial markets in mounting fears of an imminent American recession.

Stock markets around the world tumbled in the worst falls seen since the panic selling that took hold in the wake of the September 11, 2001, terror attacks on the United States.

Richard Buxton, a fund manager at Schroders, said: “This is a difficult phase and the next few weeks could be horrible. The source of this [sell-off] is a fear of going into a severe slowdown or a recession. We’ve seen some share prices halve, which is too much; it’s very concerning.”

The latest sell-off was sparked in China after the country’s banking regulator sent a deep chill through the nation’s financial sector when it said that the US sub-prime turmoil could force some of China’s biggest banks to announce large write-offs.

To make an already tense situation worse, the authorities also forecast a possible return to the era of rising bad debts and a potentially massive setback in the emergence of Chinese banks as global financial powerhouses.

The Hang Seng index in Hong Kong hit its lowest point of the new year, closing down 1,383.01 at 23,818.86. The Nikkei in Japan fell almost 4 per cent to its lowest close since October 2005. In Europe, the FTSEurofirst index of top European shares closed down 5.8 per cent, having earlier hit an 18-month low. Frankfurt’s DAX ended down 7 per cent and Paris’s CAC-40 dropped almost 7 per cent.

The falls came despite an attempt by President Bush late last week to shore up the American economy with a $140 billion (£72 billion) package of tax cuts and other measures.

David Cummings, the head of UK Equities at Standard Life, said: “There’s been persistent bad news. The question is now not whether there will be a recession in the US, but how bad it will be.

“There’s been a breakdown in the interest-rate mechanism as banks either won’t or can’t lend to each other, so central banks need to cut rates more aggressively to get the system working again.”

Fears have escalated since Ambac, one of the world’s biggest bond insurers, was stripped of its triple-A credit rating by Fitch Ratings on Friday. Moody’s put its rating of Ambac and the rival MBIA under review for downgrade.

There are concerns that the multibillion-dollar liabilities that banks hedged with the bond insurers could come back on to the banks’ balance sheets if the insurers fail.

In London, the FTSE 100 index lost 323.5 points to 5,578.2, its lowest close since June 2006 and its largest one-day loss since September 11, 2001. More than £77 billion was wiped from the value of the blue-chip index, which has lost more than 13 per cent of its value since the start of the year.

Banking stocks were hit hardest as nervous investors feared that the worst was yet to come and anticipated news of further writedowns related to sub-prime mortgages. Among the worst hit, HSBC and Royal Bank of Scotland lost more than 6 per cent. Shares of BP and Royal Dutch Shell also fell as oil prices slid by almost $2 to a six-week low below $89 a barrel. Mining stocks also suffered as base metal prices slipped in the panic.

American markets were closed for Martin Luther King Day, but the S&P 500 had its worst close in five years on Friday after President Bush’s actions failed to appease investors.

Edward Bonham Carter, the influential fund manager at Jupiter Asset Management, said: “What happened to the banks in the summer has now spread to credit insurers . . . and investors should expect to see this volatility last until at least the end of the US bank reporting season.”

Reports published by analysts at BNP Paribas and Goldman Sachs suggested that Chinese banks may soon perform multibillion-dollar writedowns or even be forced by the regulators to write down the entire value of their sub-prime holdings.

It was the language used by the Chinese authorities, said traders, that set alarm bells ringing more noisily than in the past.

Whether or not Chinese banks have accurately calculated their US sub-prime exposure is already a subject of anxious debate among analysts. With $8 billion of exposure to sub-prime mortgage-backed securities, Bank of China is thought to be the Asian lender with the highest risk of damage from the crisis. BNP Paribas analysts suggested the bank may have to write down the value of its overseas securities by just under $5 billion.

Just as concerning is the as yet unknown effect of Beijing’s own measures to cool down a white-hot lending market and tackle rising inflation.

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