Banking stocks on Wall Street bore the brunt of a brutal sell-off across the equity market in New York last night on fears that the United States was facing a 1970s-style stagflation crisis triggered by record oil prices.

The Dow Jones industrial average suffered one of its worst trading days this year, closing down 394.60 points – a 3.13 per cent slide – to close at 12209.80. But banking stocks fell more steeply, Morgan Stanley by 9 per cent and Lehman Brothers by 5 per cent.

The decline on the New York stock market was sparked by a sharp increase in the price of oil – up $11 to $139 a barrel – and official data which showed that the number of Americans out of work had risen at the fastest rate in 22 years.

The cost of sweet light crude oil shot up to a record after Morgan Stanley told its clients that the price would hit $150 a barrel within a month. The bank predicted that investors would continue to buy oil to offset the impact of the weakening US dollar on their portfolios.

After the publication of the grim jobs data, a spokesman for the White House hinted that President Bush was considering new measures to stimulate the economy, only a month after Washington returned $168 billion (£85 billion) of tax rebates to American families.

The US Labour Department reported that 5.5 per cent of the American workforce was unemployed last month, up significantly from 5 per cent in April. The rise – which equates to 49,000 people losing their jobs over the past four weeks – was the biggest monthly jump since February 1986 and left the overall jobless rate at the highest level since October 2004. Wall Street had expected a 5.1 per cent rise.

The Administration spokesman said: “Certainly, this isn’t a report that we wanted to see today. It is a number that is too high in our view but it is lower than the average of the last three decades.”

Ian Shepherdson, chief US economist for High Frequency Economics, said: “May payrolls fell 49,000, close to the consensus of 60,000, but the key number in the report is the unemployment rate, which leapt by a huge 0.5 percentage points to 5.5 per cent from 5.0 per cent.”

He said that, annualised, the unemployment rate equated to a fall of 343,000 jobs, which is “the biggest so far in the cycle” and he predicted that there would be “more to come, too”.

Philip Rones, deputy commissioner of the Bureau of Labour Statistics, said: “The over-the-month jump in unemployment reflected additional workers who had lost their jobs as well as an upsurge in new and returning jobseekers.”

Many economists believe that unemployment will continue to rise to about 6 per cent by the end of the year as the world’s biggest economy continues to slow. Although the bulk of redundancies have been made in financial services and construction, sharp job losses are beginning to be recorded across other sectors, such as retailing and manufacturing, in a move which suggests that the credit crisis that erupted on Wall Street last summer has spread across the whole US economy.

Mark Zandi, chief economist for Moody’s, said: “For the average American there is no debate that the economy is in a recession. That’s because their net worth is lower, their purchasing power is lower and it is tough to find a job. If you lose a job, it is tough to get back in.”

Traders were worried about the declines among banking shares after rumours this week that another Wall Street bank may be encountering liquidity problems. Lehman Brothers was forced to issue a statement this week to quell speculation that it was experiencing such difficulties.

Gloomy figures

49,000
Americans lost their jobs over the past four weeks, the biggest monthly jump since February 1986

5
The number of consecutive months that US unemployment has risen

$139
Price reached by light sweet crude oil traded in New York after a rise of $11

394.60
Fall in the Dow Jones industrial average. At the close yesterday it stood at 12,209.80

Source: The Times

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive