The stock market sank deeper into the clutches of a bear market yesterday as confirmation of an unprecedented slump in Britain's house prices inflamed fears of recession.

As a retreat from equities threatened to become a headlong flight, the latest plunge in blue-chip shares drove the all-share index decisively into bear market territory. A decision by the Bank of England to spurn pleas for an interest rate cut from 5 per cent fuelled another brutal stock market sell-off, leaving the all-share index down by a further 2.1 per cent.

The latest slump in the broadest benchmark index pushed it over the threshold of 20 per cent losses that defines a bear market. The FTSE 100 index also endured another drubbing, falling 122.8 points, or 2.2 per cent, to close at 5,406.8, on the cusp of a bear market.

Based on the all-share index's losses since last June, its bear market would be judged as already having lasted for 63 weeks, making it longer than four of the five previous bear market episodes since 1980.

According to David Schwartz, the stock market historian, London shares will recover into a new bull market by New Year's Eve. However, he gave warning that this expected upturn in shares may be very weak.

City strategists are equally gloomy, believing that mounting economic woes, and their toll on profits, spell more investor misery. “The equity markets are basically tanking on the back of declining earnings prospects,” Peter Dixon, of Commerzbank, said.

Fears over rapidly worsening prospects mounted after Halifax, Britain's biggest mortgage lender, said that average house prices fell by another 2 per cent last month, after a 2.5 per cent drop in May. With prices down by 8.7 per cent from a year ago, the pace of the market's slump is the fastest in the post-war era, economists said.

Investors were further rattled as Ben Bernanke, chairman of the US Federal Reserve, said that global upheavals are not over, and more signs emerged of financial stress for American institutions. “The financial turmoil is ongoing,” Mr Bernanke said.

Shares in leading US financial groups fell further. Lehman Brothers fell almost 20 per cent as Pimco, the bond giant, was forced to deny that it had pulled business from the Wall Street bank. There was also growing anxiety over the solvency of Fannie Mae and Freddie Mac, the state-backed groups that help to provide liquidity to America's mortgage market.

Shares in the two companies plunged by as much as 24 per cent and 34 per cent, respectively, as concerns grew that shareholders will be wiped out should Washington be forced to step in with a rescue if the two lenders fail to raise billions of dollars needed to weather the housing slump.

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