Shares in London began a further day of falls following steep declines across Asia after investors took fright at grim economic data in Japan and America.

After ending yesterday down 202.87 points, the FTSE 100 index of leading blue chip shares fell nearly 70 points to 3,940.71 within minutes of opening.

Last night, the Dow Jones industrial average lost 427.47 points to close down at 7,997.28 after it emerged that US consumer prices fell at a record rate in October and the US Federal Reserve gave warning that GDP could shrink next year, with growth only likely to return in 2010.

At the same time, there were increased concerns that Congress might not approve a bailout for the country's struggling carmakers.

Overnight stock markets and major currencies across Asia took a series of “catastrophic” dives as investors fled in a panic from hard evidence that America's financial contagion is continuing to wreak havoc across the globe.

The flight from risk into cash, which saw a 6.9 per cent fall on Tokyo’s benchmark Nikkei 225 Index to below 8,000 for the first time in three weeks, was triggered by dire news from the region’s largest economy.

Japanese exports to Asia fell in October for the first time in six years, signaling a dramatic downward gear shift for Asia.

The plunge in Tokyo was also driven by a sharp surge in the yen — a move interpreted by currency traders as another indicator that hedge funds and other speculators who once borrowed the yen to finance investments are pulling out of those deals.

The yen soared into the Y95 zone against the US dollar, battering the profit margins of consumer-focused giants such as Sony and Nintendo, whose profits depend heavily on the American consumer and the relative strength of the US currency.

In Hong Kong, the Hang Seng slipped 6.6 per cent and fell back below the 12,000-point mark in a huge sell-off aimed squarely at the financial and real estate sectors.

Investors are pricing in a full-blown recession for Hong Kong and are particularly concerned by its direct exposure to the twin crises in finance and global trade, said analysts.

“For months we’ve been hoping that the old adage about America sneezing and the world catching cold would not come true, but today that hope finally fizzled out”, said one trader at Mitsubishi UFJ.

The sharp 4 per cent drop in year-on-year exports to Asia from Japan suggests that the structure of manufacturing and trade within the region has come under huge strain.

Many Japanese exports to Asia are components for consumer goods that are later exported to the US and Europe from factories in China, Vietnam and Malaysia. The drop in those exports portends a wider slowdown of exports from the manufacturing hub of the world.

“The contagion of a weakening US economy over wider regions has become clearer,” said Akira Maekawa, a UBS economist, who added that significantly weakened Japanese exports to emerging economies such as Russia and the Middle East should be treated as “meaningfully” bad news for the global economy.

The headlong rush out of perceived Asian risk affected the currencies of South Korea and Indonesia, which both fell to lows not seen since the meltdown of Asian markets in 1997.

The Korean stock market, which is heavily exposed to the strength of export markets to the US and China, slumped 6.7 per cent, with several stocks dropping by their daily trading limit of 15 per cent.

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