Wall Street traders were today braced for a second day of heavy falls on the US stock markets after the US unemployment rate leapt towards a five-year high.

Employers across America slashed their headcounts in August for the eighth month in a row, according to the US Labour Department, which said markets were showing signs further signs of deterioration.

The unemployment rate was worse than expected, at 6.1 per cent after 84,000 jobs were lost in August with almost every big employment sector taking the axe to staff. Analysts had forecast a fall of 75,000.

US manufacturers led the firing spree, handing out redundancy notices to 61,000 staff last month, the most for more than five years.

The effect of the collapse of the housing market saw a further 8,000 jobs go in the sector, while 53,000 staff went in professional and business services as the nation's stricken banking groups scaled back their activities and cut jobs.

America's Dow Jones industrial average fell 128.4 points to 11,059.3, after closing 344.60 points, or 3 per cent, down yesterday when it emerged the number of people claiming jobless benefit increased and the retail market revealed further signs of slowing.

The FTSE 100 closed down 121.4 points to 5,240. Yesterday, US panic spread to to London which closed 2.5 per cent lower.

A drop on Wall Street would cap a torrid day for dealers in Europe as fresh fears about the credit markets stoked fears that the Continent was heading into recession. The euro and the pound both fell heavily against the dollar.

Sterling fell to a two-and-a-half year low against the American greenback at $1.7616.

The euro was at $1.4240, compared with $1.4325 yesterday, after falling to an 11-month low against the dollar in Tokyo, as it also faced a strong rally by the yen, Japan's currency.

The falls followed bearish economic comments yesterday by Jean-Claude Trichet, the president of the European Central Bank (ECB).

The ECB also tightened its criteria for exchanging assets with Europe's cash-strapped banks yesterday, prompting worries that another financial services provider might spiral into crisis as lenders find it hard to secure capital from the wholesale markets.

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