Investors made a desperate break for safety yesterday amid growing disillusionment over government efforts to avert a financial meltdown.
As European leaders bickered and Chancellor Alistair Darling again failed to deliver a concrete action plan, the FTSE 100 suffered its biggest one-day points fall in its 24-year history.
Over £93.5bn was wiped off the value of the UK's biggest companies as the Footsie plunged 391.1 points, or 7.8% to 4589.2 - the steepest percentage slide since the 1987 stock market crash.
Panicked investors dumped shares and moved their cash into assets that hold their value during a recession.
Gold rose 6% to $875.50 an ounce and government bonds, known as gilts, were up as the stampede for safety gathered momentum.
The flight to quality came as the mood on financial markets darkened amid mounting disarray among European monetary authorities.
Denmark, Iceland and Sweden all moved to shore up their creaking banking systems, while Germany back-pedalled after Chancellor Angela Merkel apparently offered a blanket deposit guarantee this weekend.
Banks bore the brunt of the panic selling on fears that governments will ultimately be forced to take big equity stakes in Britain's lenders, diluting existing shareholders.
Royal Bank of Scotland (38.1p lower to 148.1p) lost a fifth of its value as ratings agency Standard & Poor's downgraded its debt for the first time in a decade.
Barclays, which like RBS is facing further losses on its portfolio of toxic assets, plunged 54p to 314p.
The mood was just as bleak on Wall Street as the penny dropped that the $700bn bailout plan, passed by Congress last Friday, may not be bold enough to repair the battered US banking system.
When the plan comes into force, banks will be allowed to dump their toxic debt with the government.
But Credit Suisse estimates that the bailout will only inject an extra $140bn into cash-strapped American banks, whereas they need at least $600bn to pay for further credit crunch losses and bolster their balance sheets.
The stock market looks set to plunge even more over the coming months if the Washington bailout scheme does not give banks the confidence they need to start lending to each other.
Over 60% of loans given to companies are linked to sky-high wholesale borrowing rates, and the danger is growing that the dearth of credit will see the global economy seize up completely. Economists at UBS warned: 'The world economy is slipping into recession. We now believe national recessions in the US and the UK will be deeper and longer than previously forecast.'
As trading was suspended on Brazilian and Russian stock exchanges yesterday, the Swiss bank warned that emerging market titans like China and India will suffer major economic slowdowns.
Investors took little comfort from Darling's Commons statement yesterday, in which he attacked the Irish and German governments' conduct over bank guarantees. The Chancellor said the UK would not be prematurely rushed into announcing any major bank bailout schemes, refusing to provide a 'running commentary'.
The focus would be on restoring liquidity to the banking system, as well as examining proposals to bolster firms' capital and overhauling regulation, he said. The clamour for the Bank of England to slash interest rates at its monthly policy meeting this Thursday is rising.
The British Chambers of Commerce last night joined the Confederation of British Industry in calling for a half point cut to avert a 'major' recession.
The business lobby warned that unemployment would rise by between 300,000 and 350,000 over the next year or two, which would take the total to over 2m.
