Shares in New York opened in positive territory today after a US government report showed a surprising increase in September new home sales, tempering worries about the prospects of a deep recession.

The Dow Jones industrial average gained 134.05 points to 8,513.00 by 1pm in New York. However, a late drop saw US stocks end the day down 203 points or 2.42 per cent at 8,175.7.

Jean Claude Trichet, chairman of the European Central Bank (ECB), also provided traders with encouragement when he appeared to open the door to another ECB rate cut when he said one was a possibility, but not a certainty.

The improvement in sentiment carried across the Atlantic and the FTSE 100 index of leading shares, which had been down by 5 per cent in morning trade, recovered to down 30.77 points or 0.8 per cent at 3,852.59 by close. This was still its lowest close since April 2003.

But sterling plunged against the dollar today, having fallen through $1.60 for the first time in five years on Friday. The pound lost a further 3 cents to $1.542 amid mounting fears of a prolonged UK recession, but recovered to $1.5670 by late afternoon.

European stock markets were also down around 5 per cent in afternoon trade, following big falls in Asia with Hong Kong's Hang Seng down more than 10 per cent and the Nikkei in Tokyo losing 6 per cent.

France’s CAC 40 closed down 4 percent, but Germany’s DAX ended the day up 0.9 per cent, powered by a jump of more than 150 per cent in Volkswagen shares that came after Porsche said it had increased its stake in the biggest European car maker.

The oil price dipped below $60 a barrel, hitting its lowest level since February 2007. US light crude for December delivery settled at $63.22 a barrel, down 93 cents, its lowest settlement price since May 29, 2007. London Brent crude settled down 64 cents to $61.41 a barrel.

Friday's GDP figures showed that the British economy shrank by 0.5 per cent in the three months to the end of September, the first time quarterly GDP has fallen in more than 16 years.

Sterling has fallen 12 per cent from $1.72 in a week and was put under pressure when Mervyn King, Governor of the Bank of England, admitted it was likely that the country was heading for a prolonged and painful recession.

Gordon Brown piled further pressure on sterling by reiterating Mr King's comments.

The Bank of England is being pressured to cut interest rates further and the Government is attempting to stem fears about the falling currency. On Friday Stephen Timms, Financial Secretary, said the fall in the pound was not a condemnation of the country’s economic policy.

“I don’t think it’s a vote of no confidence,” Mr Timms said. “We don’t have a target for exchange rates. Exchange rates are volatile and go up and down. And, of course, there are exporting companies in the UK that will benefit from what has happened. And I don’t know what will happen in the future.”

Mansoor Mohi-Uddin, a currency analyst at UBS, predicts that the pound could fall to at least as low as $1.38, the low point it reached after sterling's ejection from the exchange rate mechanism in 1992. "But an even worse crisis in sterling cannot be ruled out now, given the trends of the foreign exchange markets," he said.

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