Oil shares drag down Wall Street

Tension remains despite interest rate cuts by the US Federal Reserve

Wall Street shares fell on Wednesday as weakening commodity prices hit some of the biggest US companies.

Exxon Mobil fell 4.0% and Chevron lost 4.6% after crude oil fell by more than $6 a barrel on worries about the outlook for the US economy.

But bank shares were higher, lifted by better-than-expected results from investment bank Morgan Stanley.

The Dow Jones closed down 2.4% or 294.8 points at 12,097.9 while the Nasdaq fell 2.6% to 2,210.1.

London's FTSE 100 index was down 1%, Frankfurt's Dax was down 0.3% and in Paris the Cac 40 was down 0.5%.

Additional funds

Despite Morgan reporting a 42% drop in first-quarter profits, analysts had expected much worse from the bank.

More on the City trading probe

Analysts said US investor confidence was further lifted by US Treasury Secretary Henry Paulson's announcement that changes to government-backed mortgage providers Fannie Mae and Freddie Mac would release an additional $200bn (£100bn) for the financing of home loans.

US stocks were also helped by Tuesday's latest interest rate cut from the Federal Reserve.

Yet despite the rises, analysts said market turbulence could continue for some time.

The UK stocks news was dominated by sharp losses to banking stocks, led by HBOS.

The declines led to the UK market watchdog, the Financial Services Authority, announcing that it was looking into whether rumours had been deliberately spread to undermine bank shares.

Officials at the Bank of England denied that any UK banks were in trouble.

Concerns about the financial strength of banks were strengthened last week when the fourth-largest corporate lender in the US, Bear Stearns, needed emergency funds before being bought by rival JP Morgan Chase.