Shares plunged worldwide yesterday as panicked investors fled stock markets amid anxieties that the flood of cheap credit that has fuelled a global boom in corporate deals is drying up.

Mounting fears that a credit crunch will end the easy lending that has fuelled a wave of takeovers, and pushed shares to record highs, sent shockwaves through markets on both sides of the Atlantic.

In a bloody day in the City’s dealing rooms, the FTSE 100 index slumped by 203.1 points, or 3.2 per cent, to 6,251.2. £48.5 billion was wiped off the value of Britain’s leading shares as the blue chip benchmark succumbed to its sharpest points drop for five years, and its biggest percentage loss since March 2003.

In New York, leading US shares were also battered, with the Dow Jones industrial average at one point trading down as much as 447 points to 13,335.30, before later recovering to close down 311.50 points, or 2.3 per cent, at 13,473.60.

The severity of the losses, as fearful investors stampeded for the exits, triggered “circuit-breakers” at the New York Stock Exchange designed to put the brakes on sudden plunges in stocks. The broader S&P 500 index of US blue chips also dived by more than 2 per cent.

The latest in a series of triple-digit swings in the Dow’s value, as well as London’s heavy losses, was deepened as worries over the economic impact from the US housing market downturn were exacerbated by news that sales of new homes in America tumbled by 6.6 per cent last month in the largest drop since a 12.7 per cent plunge reported in January. A new jump in oil prices, to almost $77 a barrel, added to the edgy mood.

Other leading stock markets were also pounded. Shares on European bourses fell across the board, in their most severe losses for more than four months. Germany’s benchmark Dax index lost 2.3 per cent, while France’s CAC 40 dropped 2.5 per cent.

Analysts said that the latest bout of turmoil worldwide was driven by growing concern that the cheap finance that has driven a global glut of corporate deal-making is evaporating as institutions rethink the financial risks they have been taking on.

Ryan Larson, a senior equity trader at Voyageur Asset Management, said: “The real concerns are about credit and oil pushing higher. Wall Street continues to walk a wall of worry.”

The anxieties were initially sparked by the shakeout in America’s sub-prime mortgage market amid a jump in defaults on loans made to high-risk borrowers. But worries have intensified this week as backers of big buyout deals have run into severe difficulty in securing finance, despite increased interest rates, raising the spectre of a broad “credit crunch”.

Those fears infected stock markets yesterday as investors fretted that the deal-making driving share prices upwards may now run out of steam, and sought sanctuary in the traditional safe havens of government bonds.

The tremors in debt markets were underlined as the iTraxx Crossover index, the key barometer of sentiment in credit markets, pushed through 400 basis points (4 per cent) for the first time – indicating that the cost of insuring against defaults on risky debt has doubled since mid-June. The ABX benchmark index of US sub-prime loans meanwhile sank to record lows. “We’re watching the slow-motion suicide of the capital markets,” one trader said. Another added: “It’s just driven by fear at the moment. It’s gone beyond the realms of irrationality.”

Among the casualties in the stock market fall yesterday was Moneysupermarket.com, one of the year’s largest London flotations. Shares in the online price comparison site opened trading at 170p, the bottom of a preannounced range, valuing the firm at £843 million. But even that could not prevent heavy losses on its debut as the shares suffered a baptism of fire to close down 12p at 158p. More than £800 million was also wiped off shares in Legal & General, the UK’s third-largest insurer. The near 8.25 per cent fall in L&G’s share price came as lacklustre margins on its business added to worries that the insurance sector is most exposed to any stock market downturn. The oil heavyweight Shell, the largest London-listed company, reported a leap in profits to $7.5 billion in the second quarter, but was also sold off. Its stock slid 2.1 per cent to £19.72.

Even the popularly held BT, despite solid results revealing its highest quarterly share of broadband customers in nearly four years, was not immune and its stock dipped 17¼p to 311p.

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