The FTSE 100 has closed the year down 31 per cent, its worst 12-month period since the index was created in 1984.

The final half day of trading today on London's index of leading shares resulted in a gain of 41.49 points to 4,434.17 — but this was nowhere near enough to prevent a record slump since last January. The index finished 2007 at 6,456.91.

Today's grim result followed record falls in Asia yesterday and today.

Shares in Paris later showed an annual fall of 42 per cent — the worst slump in 20 years, while German shares crashed 40 per cent, giving the Dax index its second worst annual performance in its 20-year history.

Most analysts are forecasting the FTSE index will fall further in early 2009, before bottoming out around the middle of the year and closing with modest gains. Reuters' poll of 13 equity strategists gives a median forecast of the FTSE 100 to close next year at 4,700.

Analysts pointed out today that stock markets usually recover about six months to a year before economies emerge from recession.

Darren Winder at Cazenove, the broker, predicts a FTSE close in 2009 at 5,000. "We should see a recovery in cyclical stocks, such as those exposed to consumer demand. It will be quite broadly based with an improvement in investor sentiment," he said.

The year's collapse was led by the banking sector, which fell by 58 per cent in 2008. Two of its constituents, Northern Rock and Bradford & Bingley, were taken into state ownership at zero value for shareholders, while mortgage lender Alliance & Leicester was snapped up by Spain's Santander in an all-share offer that represented a fraction of the value at which it began the year.

HBOS, owner of the Halifax and Bank of Scotland, is the worst performing stock that remains in the FTSE 100, down just over 90 per cent on the year. It will be taken over by Lloyds TSB in the next few weeks.

The mining sector also experienced a collapse, losing 57 per cent of its value in the year as groups such as Rio Tinto and Xstrata made multibillion pound acquisitions at what turned out to be the peak of a commodities boom. It came to a dramatic end this autumn as China's stellar growth began to stall.

Property developers were also disproportionately hit by the credit crunch, with the FTSE's real estate index losing 46 per cent of its value. Developers have borrowed heavily to finance speculative new office blocks and housing estates.

Insurance companies, such as Prudential and Aviva, have succumbed to worries over their exposure to sub-prime mortgage investments and corporate bonds. The insurance sector lost 36 per cent, underperforming the market as a whole.

Despite the collapse of several high profile retailers into administration, the retail sector fell roughly in line with the market, down 31 per cent on the year.

It was left to pharmaceuticals to outperform, up 6 per cent on the year, since the demand for medicines tends to increase in a recession.

China’s stock market became the worst major performing index in the world for 2008, ending the year down 65 per cent today.

The annual drop, triggered by a broadening global economic malaise that has punctured China’s unprecedented economic boom, was the biggest in the index’s 18-year history, wiping out nearly $3 trillion in market value — not far off the total value of the country's $3.4 trillion annual gross domestic product.

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