MORE than £40 billion was wiped off the value of Britain’s blue chip shares yesterday as equity markets on both sides of the Atlantic slumped again, with the FTSE 100 index suffering its steepest losses for more than 3½ years.

The latest day of bloody trading on stock markets in London, Europe and New York came as already jittery equity investors took flight in fear of new increases in US interest rates after much worse than expected American inflation figures.

Amid torrid trading, London shares were among the biggest victims of another day’s aggressive selling that saw the FTSE resuming the severe losing streak that has gripped it since last week.

The FTSE 100 closed down 170.7 points, or 2.9 per cent, at 5,675.5, succumbing to its biggest points fall since September 2002, in the build-up to the Iraq war, and its sharpest percentage drop since March 2003. More than 4.1 billion shares changed hands, with every stock in the FTSE 100 shedding value.

The FTSE has now shed 430 points, or 7 per cent, from last Tuesday’s close, since when five out of six trading sessions have seen heavy losses. The blue chip benchmark is now 7.5 per cent below April’s five-year high.

Shares in New York and on continental bourses also endured a further battering.

By late afternoon on Wall Street, the Dow Jones industrial average was down more than 200 points, or 1.75 per cent, with heavy losses leading the New York Stock Exchange to impose trading limits. America’s broader-based S&P 500 tumbled by 1.1 per cent, and the tech-laden Nasdaq fell by 1.3 per cent, erasing all its gains this year.

Europe fared even worse, with the French CAC-40 and Germany’s DAX plunging 3.2 per cent.

Investors’ alarm spread to bond markets, with prices for benchmark ten-year US Treasury notes falling sharply, driving the yield up to 5.17 per cent from 5.11 per cent late on Tuesday.

The latest bout of market turmoil came after concern over higher US interest rates was sparked by steep gains in American inflationary pressures.

“Core” US consumer prices, excluding those for food and energy, jumped by 0.3 per cent in April, for a second month in a row, in the worst such back-to-back rises since late 2001. The annual rate for “core” inflation climbed to a 13-month high of 2.3 per cent.

Nervousness over higher interest rates was compounded by a three-way split on the Bank of England’s Monetary Policy Committee, with one member backing a rate rise in the first such vote for a year.

But City equity strategists argued that markets were over-reacting. “I think it’s a bit irrational. . . it’s difficult to justify a 400-point sell-off,” Robert Parkes, of HSBC, said. Mike Lenhoff, of Brewin Dolphin, agreed: “It doesn’t strike me that this is a rout that is going to turn into a secular bear market.”

Fears over a dollar slump continued to rattle markets, but the US currency clawed back ground yesterday after Thierry Breton, the French Finance Minister, said that “everything” must be done to prevent the euro rising too far against the greenback.

LSE SLOWDOWN

Stockbrokers withdrew orders from the London Stock Exchange after acute system slowdowns. Users of the Fidessa trading system switched to back-up systems. However, exceptional volumes prompted the LSE to limit access at 4.10pm. Some brokers, unable to maintain accurate prices, pulled orders, creating a temporary vacuum.

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