European Stockmarkets spooked by fresh credit crunch fears

Fears of fresh losses in the financial sector spooked stockmarkets worldwide today, sending shares falling in London and across Asia.

The FTSE 100 plunged 150.2 points, more than 2.6%, to a low of 5362.5 points by 9.30am, its lowest level since November 2005. Every company on the index dropped, with banks among the big losers. Royal Bank of Scotland lost 5%, while Lloyds TSB fell 3.7%.

The FTSE has now fallen more than 20% since its peak of 6732.4 last June, meaning it is now officially a bear market. One City commentator warned today that the index may fall below 5000 before it hits the bottom.

"This is a sentiment play, not a valuation play," said David Buik of BGC Partners. "Morale is down, confidence is shot to ribbons and sentiment is dreadful."

The mood was just as bleak on the FTSE 250 index, where crisis-hit Bradford & Bingley dived another 23% to 32.5p, further away from the 55p at which it hopes to raise fresh capital through a rights issue. Yesterday one analyst claimed its shares were effectively worthless.

Alliance & Leicester, which like B&B is exposed to the trauma of the UK housing market, fell almost 8.5% this morning.

Other European markets shared the gloom, with Germany's DAX off 2.4% and the French CAC almost 2.5% lower.

The sharp sell-off was fuelled by fears that the credit crunch is entering a dangerous phase, at a time while inflation is rising and many companies are feeling the squeeze.

Buik said it was "inevitable" that banks would have to announce more write-downs, as the deteriorating housing markets means there is no demand for mortgage-backed securities. He believes that shares would rally strongly if the banking sector was able to persuade the markets that the credit crunch was over.

"Instead, we have this creeping paralysis that is so bad for everyone," Buik said.

Yesterday, in a torrid session on Wall Street, shares in two of America's biggest mortgage providers plunged after it was reported that the pair will soon announce billions of dollars in new sub-prime losses. Freddie Mac lost 18% and Fannie Mae fell 16%. Lehman Brothers, which was recently hit by speculation that it could suffer the same fate as Bear Stearns, shed 8%. Many Wall Street financial institutions are scheduled to publish quarterly financial results in the next few weeks, and some analysts believe there could be yet more subprime write-downs.

This helped to send share prices falling across Asia earlier today, where Japan's Nikkei closed 2.45% lower and Hong Kong's Hang Seng index shed 3.3%. As in London, banking shares were hit by the latest credit crunch fears.