Shares suffered a renewed battering on both sides of the Atlantic today as edgy investors took fright over the twin threats of stubbornly high inflation and further fallout from the credit crisis.

Equity markets, already badly rattled by the risk of recession across developed economies, succumbed to another severe sell-off as investors’ fears were inflamed by bad news on price pressures from Germany and the United States, and worries over fresh financial turmoil.

In London, the FTSE 100 index tumbled by 129.8 points, or 2.4 per cent, to close at 5320.4 as the bear market tightened its grip and Britain’s deepening economic woes hit shares in banks and retailers. Shares in Halifax Bank of Scotland plunged by 7 per cent, while Royal Bank of Scotland, Lloyds TSB and Barclays all registered drops of 5 per cent or more.

Leading shares across Europe and in America also endured steep losses. Germany’s Dax index closed down 2.3 per cent, while France’s CAC 40 shed 2.6 per cent. On Wall Street, the Dow Jones industrial average sank more than 1 per cent by early afternoon, in a second day of sharp decline.

The mood of rising anxiety in the markets was heightened by speculation over a US Government bail-out of Fannie Mae and Freddie Mac, the vast secondary mortgage lenders, and a dire warning of further financial upheavals from a former top official at the International Monetary Fund.

Professor Kenneth Rogoff, the IMF’s chief economist from 2001 to 2004, sounded a warning that the credit crisis was set to deepen and was likely to trigger the collapse of a large, high-profile American bank within months.

“The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said in Singapore. “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks, or big banks.”

The professor also stoked concern over US inflation, criticising the Federal Reserve for having cut American interest rates too drastically to fend off recession. “Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he said.

Inflation concerns mounted as official figures revealed that another surge in the cost of goods leaving American factories last month drove US producer price inflation up to an annual rate of 9.8 per cent, its highest for 27 years.

The stark figures came hard on the heels of data last week showing US consumer price inflation at a 17-year high of 5.6 per cent last month.

Global inflation fears were fuelled as German figures told a similar story. Prices for goods leaving factories in Europe’s biggest economy leapt last month by 2 per cent, in the sharpest monthly gain since February 1974. The rise lifted their annual pace of increase to 8.9 per cent, also a 27-year high.

With the previously soaring cost of oil the key driving force behind the jump producer price inflation on both side of the Atlantic, recent sharp falls in crude prices have boosted hopes that some respite may be in sight.

Crude has dropped heavily from its record levels above $147 a barrel to levels below $115. Shares were dealt a further blow, however, as oil prices leapt once more, with benchmark US light crude climbing by more than $2 a barrel and back above $115.

Explore Economics

• Pre-Budget Report 2009

• 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