Technical problems paralysed the London Stock Exchange yesterday afternoon as Wall Street suffered one of its worst trading days this year.

The London Stock Exchange (LSE) was forced to extend its closing auction by more than an hour after traders’ screens froze at 3.50pm because of a technical problem at the exchange.

Furious stockbrokers pointed out that the timing of the LSE’s first technical breakdown in seven years was dire, because MiFID, an EU measure to increase competition among exchanges, was introduced only last week.

It also coincided with sharp losses on Wall Street as the Dow Jones industrial average sank 360 points, a near3 per cent fall, erasing all the gains that the US equity markets have made since the Federal Reserve cut rates in September.

US markets were unnerved when the New York attorney-general, who is investigating America’s mortgage industry, said that he was looking at the possibility of “collusion” in the loan appraisals at Washington Mutual, one of the biggest lenders in the US. Shares in Washington Mutual fell 17 per cent, dragging banking and financial stocks with them. The sector suffered its worst fall for five years. The attorney-general has also subpoenaed loan documents from Fannie Mae and Fred-die Mac to find out if appraisal values on homes were illegally inflated.

Shares were also depressed by weakness of the dollar, which fell to its lowest for 30 years, and the worst quarterly loss in General Motors' history. Morgan Stanley last night added to the gloom by announcing that fourth-quarter earnings would be hit by an estimated $2.5 billion writedown arising from its sub-prime exposure.

Traders in London will be hoping that there is no repeat of the technical problems at the LSE when they try to react to Wall Street’s losses today.

The LSE promised to recalculate the FTSE indices once the closing auction ended but last night it was unclear whether this had been done. Traders were forced to wait until this morning to settle their trades because the prices transmitted by the LSE were unreliable. The closing auction usually takes ten minutes after the 4.30pm market close but yesterday it was extended to 6pm.

An LSE spokeswoman said that there was failure of the Infolect system that transmits real-time data to the market, preventing trading on the exchange’s order book. “This is a connectivity issue,” she said.

It is the exchange’s first major technical problem since 2000, when the LSE suffered one of the most serious computer breakdowns in its history. The exchange was paralysed for almost eight hours after being forced to shut down its trading platform, leaving brokers unable to buy or sell shares.

The problem yesterday came at the end of another tough day in London for the banks, after a note from analysts at Sanford Bernstein sent shares in Barclays and the Royal Bank of Scotland sliding. The analysts, who cut their 12-month price targets, said that the credit crunch would slice £4.6 billion off the value of Barclays and £4 billion off RBS. Both banks said that they were not planning to make any announcements before their scheduled preclose statements. Barclays is due to give an update on November 27 and RBS on December 6.

On the Continent, Société Générale suffered a 40 per cent fall in its third-quarter investment banking profits after taking a €230 million (£160 million) writedown on its exposure to debt related to sub-prime mortgages.

Moody’s sent a further chill through global markets by placing 16 more structured investment vehicles (SIVs), which hold about $33 billion of debt securities, on review for possible downgrade. Moody’s said that it was working on the assumption that each SIV was in wind-down mode, meaning that the vehicles were rushing to sell their assets to fund commitments in the commercial paper market.

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