US stocks followed markets around the world, diving today as investors worried that efforts to untangle credit markets would not prevent a recession.

Warning from the US Federal Reserve Chairman Ben Bernanke that the American economy faced a significant threat, also helped to drive the Dow Jones Industrial Index down by 733.08 points or 7.87 per cent at 8,577.91.

At a speech delivered to the Economic Club of New York, Mr Bernanke said: “Stabilisation of the financial markets is a critical first step, but even if they stabilise as we hope they will, broader economic recovery will not happen right away.”

The broad Standard & Poor’s 500 index dropped more than 6 per cent.

New US data initiated the fall this morning, revealing that retail sales fell by 1.2 per cent in September, compared to a 0.4 per cent fall in the month before. At the same time, prices paid to producers of goods declined, by 0.4 per cent, in September.

Car sales emerged as the worst hit, falling to an annual rate of 12.5 million in September - the lowest number since 1993. Furniture sales also declined, down 2.3 per cent.

Shares around the world took a battering today as focus shifted from the global banking bailout that has been consuming investors to the wider economy and fears that a recession will soon envelop leading industrialised nations.

The FTSE 100 Index’s two-day revival came to a shuddering halt, losing 313.86 points or 7.16 per cent to 4,080.35 on a surprise rise in the number of people out of work, by 164,000 to 1.79 million, marking the fastest increase in 17 years.

Germany’s DAX index fell 6.5 per cent, and France’s CAC 40 lost 6.8 per cent.

Tim Hughes, head of sales trading at IG Index, said: “Gains made on the back of the recent banking rescue plans from the US and European countries have been wiped out today as investors began to take the impact of slowing economic growth on board.

“It’s all or nothing at the moment, with yet another large one-day movement. The comedown after the euphoria of the multi-billion pound bailouts earlier this week seemed inevitable, although a sharp rise in the latest UK unemployment figures hasn’t helped matters.”

In Hong Kong, the Hang Seng index fell 5 per cent after losing 834.58 points to close the day at 15,998.30.

Japan's Nikkei index closed 1.1 per cent higher at 9,547.47. However, trading in Tokyo was in marked contrast to yesterday when the Nikkei recorded its largest-ever one day gain, rising by 14 per cent, in anticipation of America's bank deal.

However, the strained money markets showed tentative signs of recovery in the wake of the bailouts. Three-month sterling Libor, the rate at which banks lend to each other, dropped to 4.550 percent from 4.635.

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