Traders in the City of London are steeling themselves for extreme market volatility after a meeting of the Group of Seven finance ministers at the weekend hinted at a worsening outlook for the global economy and even more sub-prime banking losses.

Currencies, equities and bonds are all tipped for at least a month of turmoil after the G7 meeting ended on Saturday with only weak prospects of a coordinated response to the market crisis.

Henry Paulson, the US Treasury Secretary, directly raised the prospect of worse instability to come, giving warning that markets “should expect continued volatility as risk is repriced”.

The meeting, held in Tokyo, may even trigger a phase of turbulence in the price of gold, which ended last week trading at $923 an ounce, close to a record high. The G7 voted to let the International Monetary Fund embark this year on a possible sell-off of some of its $92 billion (£47 billion) of gold reserves.

Energy markets - traditionally untroubled by G7 finance ministers’ meetings – are also set for turbulence, according to Nomura Securities analysts. The G7 urged oil-producing countries to raise output amid persistently high prices.

Attempts at a show of solidarity were, economists said, drowned out by the increasing din of doom-laden comments by the “doctors” of the world economy.

Every assurance offered by the G7 leadership was carefully tempered by such words as “challenging” and “uncertain” – terms that create alarm rather than reassurance among investors.

Christine Lagarde, the French Finance Minister, spoke of a “closing of ranks” and “esprit de corps”, while Tommaso Padoa-Schioppa, the Italian Economy Minister, described “a climate of much greater pessimism and worry” than at the previous meeting last October.

However, Peer Steinbrück, the German Finance Minister, said that banking losses from exposure to US sub-prime mortgages could reach $400 billion. This is much higher than the $120 billion already announced by banks.

Senior fund managers in Tokyo said that perhaps the most distressing comment to emerge from the weekend’s summit was the interim report of the G7 Financial Stability Forum, which admitted that the world would remain vulnerable to financial crises.

It read: “We must recognise the difficulty in foreseeing and preventing financial crises.”

Asian markets reopen this week after the long Lunar New Year holiday. Some strategists are predicting that shares in Hong Kong and Shanghai might plunge by as much as 10 per cent over the coming days.

Mr Paulson’s acknowledgement at the G7 meeting that the “financial turmoil is serious and persisting” is expected to take a particularly heavy toll of market confidence.

Jean-Claude Trichet, the President of the European Central Bank, was unable to pinpoint an end to the present misery, describing the recent market frenzy as an “ongoing significant market correction”.

Asian markets have been desperately seeking reasons to unhook themselves from the problems elsewhere in the world, one Mizuho Securities broker said, but nothing coming from this G7 meeting will have delivered that.

Foreign exchange traders expect the week ahead to be especially jumpy as currencies of exporting economies absorb critical retail sales data expected from the United States.

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