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Further Sub-Prime fall-out Spreads

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World markets reel as contagion spreads
Katie Allen Friday August 10, 2007 Guardian Unlimited

A trader on the New York Stock Exchange last night. The Dow lost 387.18 points, a drop of almost 3%. Photograph: Justin Lane/EPA

Wall Street took another beating this afternoon as shares extended yesterday's heavy losses while in London the FTSE 100 suffered its biggest one-day loss for more than four years.

With a rapidly spreading credit crisis showing no sign of let up, the London index of leading shares closed down 232.9 points at 6,038.3, a fall of 3.7%.

This was the biggest one-day drop since March 2003 and wiped an estimated £63bn off the Footsie's value.

The Dow Jones Industrial Average was down more than 200 points at one stage this afternoon, but by 4.30pm UK time had pared back these losses to be 122.02 points down at 13,148.7.

The panicky mood across the Atlantic was not helped by further sub-prime fall-out in the financial sector.

Shares in Countrywide Financial, America's largest mortgage lender, dropped sharply after its warning late on Thursday that the "unprecedented disruptions" in the market could hurt its operations in the short term.

Washington Mutual, the nation's number one savings and loan firm, also saw its shares slide after warning that it will be "adversely affected" by the mortgage market turmoil.

"The dominos of the global credit system keep falling. News after the US close yesterday that two of the largest providers of home loans in the States are potentially in trouble was the trigger for today's rout," said Martin Slaney, head of spread betting at GFT Global Markets.

"The markets perceive more bad news is around the corner. It is easy to get caught up in emotive terms when we see market corrections such as this but the implications of a full-scale credit squeeze for hedge funds, private equity and leveraged buy-outs are certainly being priced in."

Fears intensified today following a report in the Wall Street Journal that US regulators were delving into the books of some top investment banks, including Goldman Sachs and Merrill Lynch, to make sure they are not hiding sub-prime losses.

The current crisis has been sparked by fears about the spread of credit problems which began with the US sub-prime mortgage market - risky loans to borrowers with poor credit histories. Many of these loans are now going bad.

Although the Bank of England has so far taken no action, many other central banks around the world have reacted to the market turmoil and their moves initially heightened the alarm.

The European Central Bank yesterday took its boldest steps since the 9/11 terror attacks to soothe markets with a massive injection of funds. Today it announced it was continuing to provide resources to financial markets. It injected an emergency €95bn (£64.5bn) into the markets and the US Federal Reserve added $24bn (£12bn) in temporary reserves to the US banking system to shore up liquidity and bring down short-term interest rates.

Overnight, the Bank of Japan and the Australian central bank took similar action.