Panic sends Dow to its worst crash in 21 years

The global stock market sell-off turned into a full-blown crash in the US last night, as panicked investors dumped shares on fears that the world is heading into a dangerous recession.

The Dow Jones Industrial Average suffered its worst one-day percentage fall since 1987 amid the ongoing instability of the banking system, miserable sales figures from US retailers, and new suggestions that the giant car maker General Motors could go bankrupt.

A year to the day after the Dow hit its all-time record, it plunged 679 points – 7.3 per cent – to 8,579, with some 450 points of the decline coming in a chaotic final hour of trading.

The plunge takes the Dow down to a level 39 per cent below the peak on 9 October 2007, and it has now lost 21 per cent in just the past seven sessions.

Many hedge funds and mutual funds, facing redemptions from concerned investors, have been dumping shares wherever possible for the past week, with sales accelerating in the run-up to the close of trading each day.

Last night's sell-off, however, eclipsed everything experienced so far. The late afternoon collapse bodes ill for the start of trading this morning in the UK, where the FTSE 100 had already fallen sharply yesterday due to a new sell-off in bank shares.

"There's a full blown credit lock-up going on," said senior US economist Kevin Logan of Dresdner Kleinwort. "Business spending is going to contract, hiring is going to go down, consumers are not going to get car loans, for example. Things are shuddering to a halt."

International efforts to solve the credit crisis with global interest rate cuts and massive support for banks had produced little discernible benefit for the second day running. The British Bankers' Association said Libor, the rate at which banks lend to each other, had fallen slightly for overnight borrowing, but continued to rise, in some cases to record highs, for longer-term debt. Other indicators of the supply of liquidity on the wholesale money market also continue to deteriorate. The TED Spread and the Libor-OIS spread, which both measure the difference between the cost of borrowing between banks and the rates on risk-free assets, both widened.

And analysts from across the financial sector calculated that it is too late to stop the credit market problems from substantially damaging the wider economy.

General Motors, America's biggest car company, saw its shares plunge 31 per cent to a level not seen since 1950 on concerns the loss-making firm will not survive a sharp downturn in consumer spending. Standard & Poor's, the credit rating agency, said the company has enough cash to get it through the remainder of this year, but said it was considering downgrading GM debt because it was not so optimistic about 2009.

GM was among more than 700 stocks where short-selling had been banned by regulators until yesterday. The temporary ban had expired at midnight and trading had been calm for most of the day, leading many traders to conclude that its end had not been a major contributor to the end-of-session panic.

Financial stocks, though, were among the hardest hit. Morgan Stanley was down 26 per cent; Wachovia was 29 per cent lower.