Shares suffered a renewed battering on both sides of the Atlantic yesterday 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 5,320.4 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 and Royal Bank of Scotland, Lloyds TSB and Barclays registered drops of 5 per cent or more.

Leading shares across Europe and in America also endured steep losses. The Dax index, in Germany, closed down by 2.3 per cent, and the CAC 40, in France, shed 2.6 per cent. On Wall Street, the Dow Jones industrial average sank by slightly more than 1 per cent, closing at 11,348.50 points, down 130.80.

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

Kenneth Rogoff, the chief economist of the IMF 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,” Professor Rogoff said in Singapore. “I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.

“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.” He also stoked concern over US inflation, criticising the Federal Reserve for cutting 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.

Global inflation fears were fuelled as German figures told a similar story. Prices for goods leaving factories in Europe’s biggest economy leapt by 2 per cent last month, 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 in producer price inflation on both sides 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 below $115. Shares were dealt a further blow yesterday, however, as oil prices leapt, with benchmark US light crude climbing more than $2 to above $115.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts