The FTSE 100 finished its worst week in more than six years with a further 2 per cent slump yesterday, after a day of global gloom over job losses and sinking house prices.

The benchmark index of Britain’s top companies closed down 121.4 points at 5,240.7, its third consecutive daily fall of more than 2 per cent. The weekly loss of almost 7 per cent is the steepest decline since July 2002.

Traders fear that the FTSE will soon be scraping the 5,000-point lows of a year ago unless there is a big bout of merger and acquisition speculation to force it up again. It has already lost 19 per cent this year.

Paul Webb, the chief dealer at CMC Markets, said: “The doom and gloom surrounding the global economic outlook could be sufficient to drag the index towards the July 2008 lows and even towards that huge 5,000 level.”

In the currency markets, sterling hit a two-and-a-half year low of $1.7538 against the dollar before recovering to close at $1.7660, after bad news on US jobs made the pound more attractive.

Simon Derrick, head of currency research at Bank of New York Mellon, said that sterling’s rise late in the day showed that traders were adjusting their short positions on the pound after its 2.5 per cent fall this week.

The UK was also battered by further dire warnings on the housing front, when a leading estate agency said that the property market was unlikely to recover until 2011. Savills, which specialises in selling upmarket properties in London and the South East, said that house prices were likely to fall by 25 per cent during 2008 and 2009.

The agent predicted a 1 per cent rise in house prices in 2010 but said that a significant recovery in prices would not materialise until 2011. Meanwhile, Bruno Paulson, a Sanford Bernstein analyst, warned that if Britain goes into recession, 1.3 million homeowners will fall into negative equity.

Savills’s predictions preceded more bad news from the US. New data revealed that America’s unemployment rate was at a five-year high and that housing foreclosures were at their highest level in nearly three decades. The US Labour Department said that unemployment jumped by 0.4 percentage points in August to 6.1 per cent, the highest level since September 2003.

US stocks lost 2.8 per cent in a dire week that has included poor sales figures from retailers and a warning from Bill Gross, a leading fund manager, that the country faced a “financial tsunami”. Yesterday the Dow recovered from heavy early losses to close at 11,221.00, up 32.70 points after a rally based on hopes that the market was close to the bottom.

The Mortgage Bankers Association heaped further woe on American investors with new data showing that foreclosures leapt in the second quarter to 1.19 per cent, the first time they have exceeded 1 per cent since the survey began 29 years ago.

Hugh Johnson, the founder and head of Johnson Illington, the US fund manager, said: “Today’s data shows that we are almost certainly in a recession. It suggests very strongly that the economy is contracting in the third quarter and that that is likely to continue into the fourth. I knew the economy was doing really poorly, but today’s figures are still a bit of a surprise.” A recession is defined as two consecutive quarters of declining gross domestic product.

Stock markets around the world also suffered. China’s Shanghai index dropped 3.3 per cent to its lowest close in 21 months. In Japan the Nikkei 225 lost 2.7 per cent, and the Hang Seng in Hong Kong fell 2.2 per cent, dropping below 20,000 for the first time in more than a year.

Mark Matthews, the chief Asia strategist at Merrill Lynch, said that Asian investors were losing faith in the global economy. “They think [it’s] still going to get worse,” he said.

Grim news from the corporate sector added to the gloom. Nokia, the world’s biggest mobile phone maker, said that its third-quarter market share would be lower than the 40 per cent hit in the second quarter. The Finnish company’s shares plunged by 14 per cent on the announcement.

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