Leading stock markets in Europe and America declined by more than 2%, while bond yields increased and the dollar lost value.

In New York, the Dow Jones Industrial Average fell by 181 points to 10,791, while the high-tech Nasdaq index had an even bigger relative fall, down nearly 3% to 2640. Declining stocks outweighed advances by three to one.

Technology stocks were particularly hard-hit, with the Nasdaq index now having declined nearly 10% since the middle of the month.

Small investors saw hundreds or thousands of dollars wiped off their stock values.

Internet stocks did poorly, with Amazon.com now trading at only half its high point of the year. Microsoft also fell on the news that the US government had asked some technology bank to develop plans for its possible breakup.

Inflationary signal

The 30 year Treasury bond declined sharply, falling nearly three quarters of a point and raising the nominal interest rate to 6.07% - well above the short-term US rates of 5% set by the Federal Reserve last month.

The chairman of the Fed, Alan Greenspan, has warned that he will not hesitate to act forcefully and promptly if inflationary pressures appear on the horizon. The increase in US wage costs, by 1.1% in the quarter, was just such a signal that the market was fearing. Mr Greenspan has already raised interest rates once, by 0.25%, in June.

Up until now, inflationary pressures have been benign despite the strong US economy. With that economy now slowing down, as growth fell in the quarter to an annual rate of 2.3%, company profits could come under pressure.

European worries

Stock markets across Europe also took note of the American figures.

The London Stock Market, Europe's biggest, fell by 3%, with the FTSE 100 falling by 179 points to 6117.

In Frankfurt, the Dax index also fell by 3%, dropping 177 points to 5052, while in Paris the Cac 40 lost 122 points to 4306.

The sell-off accelerated as the day went on, as dealers saw little demand for shares, with low volumes during the summer holiday season.

The weakness of the dollar added to the woes of European markets. The weak euro has boosted exports, and its revival could hurt many companies that sell goods to the United States.

The euro finished the day at $1.0711, up nearly a cent over Wednesday's close.