More than £30 billion was wiped off the value of Britain’s biggest companies yesterday as new levels of hysteria in the US banking crisis fuelled fears about the economic and financial fallout on both sides of the Atlantic.

In its latest brutal losses in the grip of a new bear market, the FTSE 100 index of bluechip shares tumbled by another 128.5 points, or 2.4 per cent, yesterday.

After the US Treasury gave an emergency $15 billion (£7.5 billion) funding lifeline at the weekend to Fannie Mae and Freddie Mac, the stricken giants that underpin a vast slice of American mortgage lending, fears that the US economic turmoil has entered a dangerous phase spilt over into the stock market in London, sending shares plunging again. The three-year low brought more misery to individual investors and British pension funds.

The FTSE’s close at 5,171.9 yesterday marked the lowest ebb for the stock market in London since October 2005, after leading shares earlier fell even farther, touching lows not seen since the aftermath of the terrorist attacks in the capital on July 7, 2005.

The steep losses came as investors took flight from shares amid anxiety that severe fallout from US financial upheavals would hit British banks and financial companies. Investors have now seen the FTSE plummet by more than a fifth in the past 12 months — and about £375 billion has been erased from the value of Britain’s bluechip shares in that period.

The latest brutal trading day on the stock market came as concern that Britain would share in the economic troubles that have battered America was fanned by another bout of bleak news over high street conditions and the soaring cost of living.

In fresh confirmation that Britain has confronted the same grim combination of rapidly rising prices alongside the weakening growth that has blighted the US, official figures showed headline inflation in Britain hitting a 15-year high of 3.8 per cent, just as the latest snapshot of the high street suggested that a key gauge of retail sales dropped last month.

As economic jitters also gripped America yesterday Ben Bernanke, the chairman of the powerful US central bank, the Federal Reserve, emphasised that the US was beset by similar threats to prosperity. Mr Bernanke told the US Congress that the danger of higher inflation in America was growing even as the peril over a severe downturn mounted.

“The possibility of higher energy prices, tighter credit conditions and a still-deeper contraction in housing markets, all represent significant downside risks to the outlook for growth,” he said. “At the same, upside risks \ to the inflation outlook have intensified lately.”

Mr Bernanke joined Henry Paulson, the US Treasury Secretary, in trying to soothe fears over the deepening financial fallout from the housing market slump in the US for banks and consumers. The fate of the housing market was “the most critical and central issue that we face”, he said.

His comments were made as worries from world markets over the US outlook made the dollar fall sharply again on foreign exchanges, to record lows against the euro.

Shares on Wall Street rose, however, when investors took heart because oil prices sank by almost $7 a barrel and markets bet that a US slowdown would hit demand for crude oil.

Mr Paulson also tried to prop up the plunging shares in Fannie Mae and Freddie Mac by insisting that the US Government would move in to buy stock in the crucial mortgage guarantee companies only if this were vital to keeping them afloat.

Shares in the companies have continued to tumble after the US Treasury said that it was ready to inject billions of dollars of taxpayers’ funds to save them, but that this would be backed by a new issue of shares that it would hold. Such a move would dilute the shares left to existing investors, severely cutting the value of their stakes.

Mr Paulson said that there were no immediate plans for the $15 billion lifeline to be taken up, or for the new shares to be issued.

“If either authority is used, it would be done so only at the Treasury’s discretion, under terms and conditions that protect the US taxpayer and are agreed to by both the Treasury and the companies,” Mr Paulson said.

His comments were made as shares in Fannie Mae and Freddie Mac dived farther after Moody’s, a ratings agency that benchmarks the financial strength of the companies, downgraded its assessment and said that it may reduce it again. Shares in Fannie Mae fell by as much as 30 per cent yesterday and Freddie Mac’s by 34 per cent, before rebounding slightly to stand at 27 per cent and 26 per cent lower respectively at the close.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive