Taylor Wimpey bucked a falling market on a report that a US private equity firm such as Texas Pacific Group was considering taking a 30 per cent stake to rescue it from a covenant breach next year. But an initial leap of 9p cooled to a gain of 2¾p to 37¾p by the close as sources close to the company played down the talk.

This suggested that the company might just be able to rescue itself before next February, when its banks are able to call in their loans. Last week the housebuilder failed to persuade shareholders to agree to a £500 million rescue rights issue.

Alastair Stewart, a well-known bear at Dresdner Kleinwort, summed up the mood by saying: “We have moved our ‘sell’ recommendation to ‘hold’ – possibly temporarily – as a precautionary measure.”

The FTSE 100 plunged 145.2 to 5,261.6, marking an official bear market and its lowest level for nearly three years as fears that the US state-backed mortgage lenders Fannie Mae and Freddie Mac were insolvent weighed on any UK stock exposed to mortgage-backed assets.

This included Royal Bank of Scotland, down 17.2p to 182.7p, also hurt by Zurich Financial’s withdrawal from bidding for RBS’s insurance business, and Standard Chartered, down 114p to £13.41. The Asian markets in which the bank operates are showing increasing signs of succumbing to the credit crunch. The bank has so far written down little of its $5.7 billion exposure to mortgage-backed assets.

In the US, Lehman Brothers plunged again and there were fresh rumours of a low ball $5-a-share bid.

Talk thatHSBC, down 27¾p at 732¼p, was a contender, is thought to be wide of the mark.

Enterprise Inns became the biggest blue-chip faller, down 28½p to 302½p on fears that plans to turn itself into a real estate investment trust may be hampered if it cannot refinance £750 million bonds relating to its Unique Pub Company pubs. Lehman Brothers did not help by forecasting that the UK would go into recession this winter, which it said would hit indebted Punch Taverns, down 28p to 225p, and Enterprise.Mitchells & Butlers fell 5¾p to 183¾p as John Magnier and JP McManus, the Irish investors, lifted their stake to just over 9 per cent.

The oil price briefly hit a new high, which helped put oil stocks among the few gainers.Cairn Energy rose 102p to £28.44, as Citigroup reiterated a “buy” andTullow Oilgained 24½p to 866½p. But fuel-user British Airways lost 11.65p to 199.1p.

Mining stocks also managed to bounce back from recent falls. Eurasian Natural Resources, the iron ore and ferrochrome miner, was the top blue-chip riser, up 90p to £11.37.

John Lewis drove Kingfisher, owner of B&Q, down 7.2p to 91.8p by unveiling another weekly sales fall. Next fell 43½p to 852p and Marks & Spencer lost 13p to 227¼p. The threat of industrial action at Argos drove parent company Home Retail Group down 16¾p to 188p.

Amec gained 6½p to 867½p after its consortium won a long-awaited contract to clean up Sellafield.

— New York: Stocks slumped as the oil price rose and investors rushed to sell Fannie Mae and Freddie Mac on speculation that a government bailout could wipe out shareholders. The Dow Jones industrial average closed down 128.50 points at 11,100.50.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts