After the carnage on global markets on Black Monday, Japan and Australia were the first powerhouse economies to see the dawn of Tuesday morning. While American markets had taken Monday off for Martin Luther King Day, the panic gripping global markets had continued to wreak havoc.

Yesterday, as US traders slept, the bloody trading began anew on the other side of the world. By midnight GMT Australia’s markets had been open an hour. Investors’ rush for the door crashed the website of the country’s leading online share broker, CommSec, as the market started an immediate downward spiral. The stock market’s fall of nearly 3 per cent on Monday looked timid as it raced towards its biggest one-day slide in 20 years. Hans Kunnen, the head of investment markets research for Colonial First State, said: “Judging by the mood of the market today, the bears are certainly winning.”

However, what the Asian markets did not know, as they started their downward spiral, was that in America the members of the Federal Reserve were calling each other. At 11pm, UK time, a video conference started in Washington that would culminate in a decision to make an unprecedented, deep cut to interest rates.

While the US policymakers agonised over their decision to cut rates, traders in Australia and Japan continued to panic as two questions gripped investors. Will there be a US recession? How much will it hurt me?

As London headed to bed at midnight, the carnage kicked off in Japan, with Tokyo's domestic shares suffering one of the worst trading days in history, diving 5.7 per cent as entire trading screens turned crimson with “sell” orders. If there were optimistic souls answering the questions in Japan, their bullishness was quickly quashed by the Bank of Japan. It admitted that growth in the world’s second-biggest economy will be lower than previous forecasts.

Rumours of large fund collapses and redemptions increased the gloom and were used to explain what brokers in Nomura Securities described as an “asset fire sale”.

The bears were ruling the Japanese markets. Recognising the seriousness of the market collapse – Tokyo-listed shares have lost nearly 10 per cent of their value this week - Yasuo Fukuda, the Japanese Prime Minister, said that “the actual economic situation in Japan is not one in which stocks keep sagging”. However, his confirmation later that the Government would take no immediate action to halt the market collapse did not lighten the mood. Blue chips such as Canon, Toyota and Sony were dragged into the downward spiral, despite solid recent performance.

While Australia and Japan led the fallers, the meltdown spread through Asian markets. At 1.30am, the market opened in a Shanghai still bruised from its 5 per cent fall a day earlier. A fledgeling market, Shanghai has out-performed its peers over the past two years, but yesterday there was only one colour on the screens – and it was an unfamiliar red.

One investor wrote on a Chinese website: “This is not just a bear market, it’s the end of the world.” Another man, in despair at the tumbling value of his stock investments, climbed to the top of a Beijing department store and threatened to jump.

Wu Lei, analyst at CITIC-Kington Securities, said: “We cannot see a floor now as the market is full of panic. The index is on the way to 4,000 if it cannot find support around 4,500 points.”

Half an hour later, at 2am British time, the Hong Kong markets opened to an indiscriminate rout. Companies from airlines to property developers plunged in value, but with financial stocks hit hardest. Early on in the day’s trading it became clear that it was going to be brutal – by the end of the sell-off HK$2.5 trillion (£160 billion) would be wiped off Hong Kong’s market capitalisation.

John Tsang, the Hong Kong Financial Secretary, urged caution, but the market paid little heed.

Dawn spread across Asia, and the panic followed close behind. At 4.25am Indian markets opened in Bombay and stayed open just a few minutes before the Bombay stock exchange authorities were forced to suspend trading for an hour. Government ministers appealed for calm after the Sensex plummeted more than 10 per cent in early deals. The flagship index, the most volatile in Asia over the past two sessions, hit a low of 15,576.30, down from 16,884.09, within minutes of opening.

During the halt in trading Palan-iappan Chidambaram, the Indian Finance Minister, called for investors to ignore the bearish signals emanating from Wall Street. “There is no reason to allow the worries of the Western world to overwhelm us,” he said. “Our economy is different, is strong.”

The minister’s words of calm were ignored as the mood darkened. The slump marked a dramatic U-turn in sentiment among India’s new generation of retail investors – especially those who had dabbled in the futures markets and have been bombarded with heavy margin calls.

Yesterday, as small retail investors absorbed Monday’s 7.4 per cent market slump, the mood was very different. In the financial press in Bombay, January 21 was already being described as India’s “Black Monday”.

By the time the closing bell tolled in Japan at 6am, not a single share in the Nikkei 225 average was in positive territory as investors pulled billions from the market. The “safe haven” status of the yen – yesterday bought strongly against the tumbling US dollar – also conspired to hurt the shares of the many exporter stocks on which the Japanese economy depends.

The mood among Japanese fund managers was black as the markets closed. The threat of a savage recession in the United States, fund managers said, is now seen as a potential time bomb for the Asian growth story. “The idea that China, India and the rest of the region are somehow going to escape unharmed has evaporated as a myth and today’s mayhem was the proof of that,” one said.

Shanghai, one of the world’s best-performing stock markets in the past two years, fell again, with the Shanghai Composite Index closing at 7amat a five-month low of 4,559.75 points, a fall of 17 per cent in the past six trading days.

The next markets to open were in the Middle East, where traders across the region pressed the “sell” button. Gulf stock markets posted record falls, dashing investor hopes that the emerging markets in the Middle East would be immune from US turmoil. As the world waited for America to wake up, the selling was spreading.

Markets in Britain, France and Germany opened at 8am, with the example of the battered Asian markets reso-nating across the Continent. The Australian benchmark S&P/ASX200 index plunged 7.05 per cent to 5,186.8, eclipsing the last big fall of 6.79 per cent amid the Asian financial crisis ten years ago.

Shanghai was down 7.2 per cent, India off 5 per cent and Hong Kong off 8.7 per cent. Small wonder, then, that the FTSE collapsed on opening at 8am, losing 4 per cent of its value within the first few minutes’ trading.

Martin Slaney, the head of derivatives for GFT Global Markets, the spread-better, said: “Everyone came in this morning braced for big losses. Rumours were flying around of a federal rate cut, but we’d heard that before. It was fairly chaotic in the markets. When you’re seeing losses like that and then it’s reversed, it’s incredibly difficult to trade.”

Paris, Frankfurt, Amsterdam and Madrid all dived within minutes of opening – but slowly sentiment began to change, as the rumours began to gain ground. The Fed was going to act. A 50 basis point cut to US interest rates was coming. In a market gripped by panic, the sense that some kind of salvation loomed turned the mood. The FTSE swung upwards, dramatically reversing its earlier falls. By 11am, the FTSE was up by 22 points, and gyrated around that mark as all eyes, hopes and fears turned to Wall Street.

While Europe held its breath, senior European politicians sought to calm fears and play down talk of a recession. “There are no signs of a recession in Germany and that’s also the case for Europe,” Angela Merkel, the German Chancellor, said.

Christine Lagarde, the French Finance Minister, said: “Even if the United States goes into recession . . . it’s not a tragedy in itself. It’s not because things are in a spin that we must lose our heads.”

While the politicians sought to calm frayed nerves, the real action had moved, inevitably, across the Atlantic.

Early morning in the United States and a conference was taking place between members of the Fed. One member of the ten-man board was absent and one voted against the rate cut – Frederic Mishkin, who claimed that current conditions did not justify a cut before the meeting scheduled for January 29-30. Then, at 1.20pm, the announcement came.

A three quarters of a percentage point cut. An unprecedented move. The first reaction was relief, and then the awkward questions came. Why so savage a cut? What does the Fed know that I don’t know? The FTSE fell back, waiting to see how Wall Street answered the questions.

As soon as the rate cut was announced, futures contracts on the Dow Jones jumped, indicating that Wall Street would open higher. However, in the intervening hour, traders changed their minds – interpreting the big rate cut as a panic measure by the central bank and recognition that the US was sliding into a recession far more quickly than had been expected.

As soon as Wall Street opened, the Dow plunged 222 points, extending its loss to as much as a 445 points, a 4 per cent slide, within minutes. Slowly, though, the confidence crept back in.

Paris closed at 4.30pm up 2.07 per cent at 4,842.54 after losing 7 per cent on Monday and a further 5 per cent within minutes of opening yesterday.

The FTSE, meanwhile, came round to the idea that the Fed’s action was benevolent rather than malevolent. After the initial panic, confidence seeped back into the market and the FTSE closed up 161.9 points. It was still some way off its its Monday opening, but the relief was palpable in the City as traders closed out their positions.

Over on Wall Street, the confidence factor was hard to pin down. The initial panic subsided, but it was replaced by doubts about the ability of Ben Bernan-ke, the Chairman of the Fed, to deal with the deteriorating credit crisis. By 7pm in London, late lunchtime in New York, the losses had lessened to about 145 points, as the market pondered the Fed’s decision. Expectations of another half percentage point cut next week – priced into the bond market – fuelled the paradox dragging on the market: the Fed needed to act to shore up the US economy, but the fact that it acted so strongly fuelled the panic that it was seeking to quash. The Dow Jones vacillated while investors digested the paradox and hoped that the Fed does not know something that we don’t.

The Dow closed down 128.10 points, at 11,971.20.

As Wall Street traders headed to the bar, however, there was a glimmer of hope from Australia. Shares in Sydney – whose market opened at 11pm London time – rallied with the benchmark S&P/ASX 200 up 6 per cent in the first hour of trading. Traders were reassured by a comment from Australia’s central bank that it had no plans to bring forward the date of its next scheduled meeting to set interest rates.

Reports by Jane Macartney, Beijing; Rhys Blakely, Bombay; Paul Larter, Brisbane; Sonia Verma, Dubai; Christine Seib, London; Suzy Jagger, New York; Adam Sage, Paris; Leo Lewis, Tokyo

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