Unemployment in America reached a two-year high during December, it emerged today, sending stock markets in the UK and US plunging as the prospect of a recession loomed over the world's largest economy.

The dollar weakened against the pound as the rate of unemployment in the US increased from 4.7 per cent in November to 5 per cent - the highest rate since November 2005 – and American payrolls grew by just 18,000 people at the end of the year compared to 115,000 in the previous month.

The Dow Jones Industrial Average fell through 13,000, losing 169.50 points to 12,887.20 while in London, the FTSE 100 index fell 102.1 points to 6,377.3. At the same time, the greenback slumped, with one dollar now worth $1.98 compared to a previous $1.97.

The unexpected rise in US unemployment, as well as oil hitting $100 a barrel earlier this week, continuing concerns about the global financial liquidity and slowing economic growth in America means the US Federal Reserve is now under greater pressure to make a further cut to interest rates.

The Fed has reduced the US interest rate by a full percentage point to 4.25 per cent since September last year to help ease the economy. The US central bank will meet at the end of this month to decide on borrowing costs and will announce its decision on January 30.

Federal chairman Ben Bernanke is meeting with George W. Bush and Treasury Secretary Henry Pulson today when the President will consider a "stimulus package" to help kick start the US economy.

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