The New York stock market slid more than 2 per cent last night as Wall Street took fright from a warning by the International Monetary Fund that there is no end in sight for the US housing slump.

Financial stocks bore the brunt of the fall, with Lehman Bros, the Wall Street investment bank, sinking 11 per cent to $15.27. The shares have fallen from $66 six months ago. Citigroup shares fell 8 per cent and Bank of America lost 5 per cent, leaving the Dow Jones industrial average at one of its most depressed levels since July 2006.

The index of New York’s leading shares dropped 239 points to 11,131, as traders were also able to react to announcements made on Friday night that two regional mortgage banks in the US had been declared insolvent.

After the market closed on Friday, the First National Bank of Nevada and First Heritage Bank of California became the sixth and seventh banks to collapse in the US since the beginning of the year. The demise of the lenders stoked fears that the financial crisis gripping America is far from over.

Confirming Wall Street’s concerns yesterday, the IMF warned that broader stresses across global financial markets and mounting losses for Western banks threaten to aggravate the worldwide economic downturn.

Almost a year after the global credit crisis took hold, the IMF sounded a warning that financial strains remain severe, and are fuelling the dangers to world economic prospects. “Global financial markets continue to be fragile and indicators of systemic risk remain elevated,” the fund said in an interim update of its twice-yearly Global Financial Stability Report.

The IMF highlighted the risk of a new wave of losses for banks as the American housing market slump deepens. Jaime Caruana, director of the IMF’s monetary and capital markets department, said: “A bottom for the housing market is not yet visible. We consider this market is still at the centre of this turmoil.”

The warning comes less than a month after IndyMac, the Californian lender, became one of America’s biggest banking failures. Its collapse is expected to cost America’s official receiver up to $8 billion.

The IMF was pessimistic about the outlook for the financial sector, pointing to a slide in key European housing markets as a potential source of yet more losses for banks. While the fund said that it believed that the full scale of probable losses inflicted by the melt-down of US “sub-prime” home loans had now largely been admitted by banks, it raised the possibility of a greater financial toll from mainstream lending, putting institutions’ balance sheets under more pressure.

After the failure of IndyMac, the IMF said: “Credit quality across many loan classes has begun to deteriorate. The growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply and prices continuing to fall, loan deterioration is becoming more widespread.”

The IMF also gave warning that central banks were being left hamstrung in their attempts to ease financial stresses by cutting interest rates because of strong inflationary pressures. Central banks had succeeded in containing risks to the financial system by providing extra liquidity, the IMF found. However, it noted that, despite this, rates for lending between banks were still elevated.

Fresh fears

Emerging market economies that have proved resilient so far in the face of the credit crisis could become more vulnerable as investors fret increasingly over rising inflation in these countries, the IMF cautioned.

“Some emerging markets are coming under increased scrutiny, especially regarding their policies to address rising inflationary pressures,” the fund said.

— Four of America’s biggest banks said they would begin selling covered bonds in a move designed to increase the number of funding routes available to institutions. While the bonds are traded extensively in Europe and form a $3 trillion market, they are less familiar in the US.

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