Fears are growing among investors that the US could face a recession in 2008, due to the funding crisis among banks, which would affect the whole global economy.
William O'Donnell, strategist at UBS, told the Financial Times: "Global stock markets have been hit hard as investors are coming to realise that it will not be different this time and US economic weakness does matter."
A report from the Organisation for Economic Co-operation and Development, which states that the US sub-prime market crisis could lead to losses of $300 billion in the collateralised debt obligation market, will do nothing to improve investors' confidence.
In the markets, the S&P 500 fell 1.3 per cent and the S&P financials index fell 2.1 per cent to its lowest level in two years.
In London, the FTSE 100 fell 2.5 per cent and the FTSE Eurofirst 300 index dropped 2.4 per cent.
The Hang Seng index took a dive of 4.2 per cent and the Nikkei 222 dipped 2.5 per cent.
Meanwhile in New York the index reached the levels arrived at when the credit crunch broke out.
David Ader, bond strategist at RBS Greenwich Capital, augured that "the dam has opened" and expected more share pullouts and greater investment in government bonds.