US Federal Reserve chief Ben Bernanke has cast further gloom over financial markets, warning of "considerable stress" and an "uncertain outlook" as the US dollar wilted and share markets in London and New York tumbled further.

UK shares today slumped to their lowest mark since 2005 as US stocks slid, with Mr Bernanke's grim assessment adding further unease about the future of mortgage groups Fannie Mae and Freddie Mac.

New York's Dow Jones index slipped below 11,000 after three straight days of losses and the dollar fell to a record low against the euro at $1.5975.

The pound rose above $2 for the first time this month, hitting a three and a half-month high. By mid afternoon, the pound was trading at $2.0072.

In London Royal Bank of Scotland (RBS) and Barclays led the FTSE 100 lower as bank shares tumbled to a 10-year low. The FTSE was down 157 points to 5142.

RBS shares lost more than nine per cent, sending the FTSE 350 banks index to the lowest level since October 1998. RBS shares were changing hands for 162.1p, down 18.4p

BT Group dropped after the phone company said it will suspend a buyback programme and British Airways also fell on news the airline would struggle to break even this year.

Capital & Regional sank 19.5p, or 13 per cent to 128p. The second-worst performing UK real estate stock this year plans to reduce debt further after selling malls and raising equity for one of the retail-property funds it co- manages.

Jessops was down 2.4p, or 31 per cent, to 5.51, a record low. The UK's largest specialist camera retailer said its loss will widen.

Kazakhmys lost 42p, or 2.8 per cent, to £14.73 after Kazakhstan's biggest copper producer said it is not planning a transaction that would be classified as a reverse takeover.

On Wall Street the Dow Jones index was 177 points lower at 10,882. Yesterday the Standard & Poor's index had its worst one-day decline since it was created in 1989 after the collapse of IndyMac Bancorp spurred concerns that more lenders are vulnerable to bad home loans.

Mr Bernanke did little to ease concerns. “In recent days, investors became particularly concerned about the financial condition of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac," he said in a keynote speech.

“In general, healthy economic growth depends on well functioning financial markets. Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."

Shares of Bank of America were down more than 4 per cent at $19.20, and insurer American International Group fell 6 per cent to $21.28.

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