Markets tumble as banking fears spread across Europe!

NEW YORK - October 6, 2008 - Britain's blue chip companies lost £60 billion in value in just a few minutes today as investor confidence crumbled and political leaders battled to avert the threat of recession.

The FTSE 100 index of leading shares fell by some 250 points in the first six minutes of trading, following sharp losses across Asia, and drifted down to reach a four-year low of 4,670.9 by late morning, 6 per cent down on Friday's close. For policymakers and central bankers, it was a nightmare start to the week - little helped by the failure of EU leaders to agree on a European banking rescue scheme or even, it appeared, on a common strategy.

There was continued confusion as to the detail of Germany's decision to guarantee all private bank deposits as Austria and Denmark broke ranks to follow suit and Spain threatening to do so if the EU did not take action.

Both Gordon Brown and Alistair Darling, the Chancellor, who is keen to avoid a similar blanket guarantee, were working the phones. Mr. Brown discussed the crisis with President Sarkozy of France this morning and was due to talk with Angela Merkel, the German Chancellor, later today to clarify Germany's plans.

"In the last 24 hours, the Prime Minister and the Chancellor have been spending a lot of time on the phone. We continue to urge cooperation at an EU and international level," his spokesman said.

No stock was in positive territory on the UK benchmark index but banks were again among the biggest fallers, with Barclays, Royal Bank of Scotland and HBOS down between 11.8 and 15.5 per cent. HBOS was marked down partly on fears that the Treasury could move towards a taxpayer-funded recapitalization of British banks - effectively a partial nationalization - that could reopen its takeover by Lloyds TSB.

As stocks fell, investors fled to government bonds and the relative safety of the Japanese yen, which gained 1.7 per cent against the dollar. The euro was particularly hard hit by the failure of the leaders of Europe's four biggest economies to agree on a coordinated bailout plan at a weekend summit, losing 1.2 per cent against the dollar and 3 per cent against the yen.

“We are seeing an intensification of risk aversion overnight and the main beneficiaries are the yen and dollar,” said Lee Hardman, a currency economist at Bank of Tokyo-Mitsubishi-UFJ. “The market is in an extreme state of paralysis.”

The FTSE's falls were mirrored across Western Europe. In France, the CAC 40 index was down 5.9 per cent by midday UK time and German's Dax index was down 5.7 per cent.

The European freeze was in contrast to the situation in the United States, where Treasury Secretary Hank Paulson's $700 billion bank rescue plan was finally passed through Congress on Friday.

“The Paulson plan may be flawed, but it at least underlined that the drive for a solution to the problem is coming from the United States, and that is where the capital is likely to flow as a result, favoring the dollar,” Daragh Maher, deputy head of global FX strategy at Calyon, said in a research note.

Trading on Russia’s main stock market, the dollar-denominated RTS, was halted again after its headline index fell more than 14 per cent.