European shares plunge as sell-off continues

London’s FTSE 100 index fell 4.1%, Germany’s Dax is down 5.7% and France’s Cac has dropped by 2.4%.

Traders remain on edge after a severe loss of confidence caused by a downgrading of US debt and further strife in the eurozone.

Bank shares are among the worst hit with RBS down 10%, Barclays falling 7.5% and HSBC 6.9% lower.

However, on the bond markets, the yield on both Spanish and Italian government bonds fell further.

The European Central Bank (ECB) is intervening in the markets to try to keep the cost of borrowing down for the two countries, which are struggling to avoid a Greece-style bail-out by the authorities.

Worries about the level of US debt caused its credit rating to be downgraded from the top triple A grade – a move that lead to severe falls on Monday of between 3%-5% for European share markets and a 5.6% fall for the US Dow Jones index – its biggest in three years, with bank shares leading the way down.

Bank of America closed down 20% in US trading, with other major banks also badly hit.

On Tuesday, Asian markets suffered their second day of steep falls, although they had recovered around half of their overnight losses by the close.

The Nikkei finished down 1.7%, South Korea’s Kospi down 3.64%, and Hong Kong’s Hang Seng down 2.8%.

Alan Brown, chief investment officer of Schroders, told the BBC that investors could see no way out of the current troubles.

“The underlying story is all of the weak economic data that we’ve seen across the eurozone and the UK and the US over the past several weeks,” he said.

“I think that investors are recognising that the authorities have very few policy levers left. They have exhausted fiscal options, interest rates in most places are at rock bottom. That is why markets are very nervous.”

Peter Esho, chief market analyst at City Index, told the BBC: “You can’t control it. You have the onset of fear in the market. There are a lot of things that don’t make sense.”

But Mr Brown said the ECB’s moves to support Spain and Italy were “potentially very helpful”.

“If they are able to keep a lid on yields in Italy and Spain then they will succeed in stopping the markets creating their own reality whereby they drive yields on Italian and Spanish debt to levels which would cause solvency problems in those countries.”

“What’s rocking the market is a growth scare,” said Kathleen Gaffney of Loomis Sayles.

She said investors were concerned about “how Europe and the US are going to work their way out of a high debt burden” if the global economy slows.

Other assets were also affected on Tuesday. Crude oil prices continued to slide amid concerns that if the economy did slow down, demand would wane in coming months.

Brent crude fell to a six-month low below $100 a barrel before rebounding to $103.31.

However, gold hit another new record of $1,771 an ounce as investors looked for assets that are considered to be less risky. The Swiss franc also gained.