Fresh banking fears knock shares

The declines come after the news that US bank Bear Stearns, at the centre of the mortgage debt crisis, has been forced to seek emergency funding.

Increasing concerns that other lenders may follow suit sent the S&P's 500 down 27 points or 2% to close at 1,288.

Meanwhile, the Dow Jones lost 1.6% or 195 points, and the Nasdaq fell 2.3%.

Sentiment on Wall Street has been further hit by the continuing weakness of the dollar and high oil prices.

Sub-prime spark

Speculation had intensified in recent days that Bear Stearns, Wall Street's fifth largest investment bank, was struggling to fund its daily business.

"This is another chapter in a book rather than a one-act play"
Analyst Phil Orlando

Its shares ended down 46% following Friday's announcement.

Analysts said markets were now worried that further banks may now need emergency funds, and that it will only exacerbate the threat of the US sliding into recession.

"This is another chapter in a book rather than a one-act play," said Phil Orlando, chief equity market strategist at Federated Investors.

The credit crunch was caused because banks became less willing to lend to each other after they suffered large losses on investments linked to the US housing market, and the sub-prime sector in particular.

Sub-prime lenders focus on clients with poor or non-existent credit histories, and a record number of borrowers have defaulted on loans.

This has had a knock-on impact on the wider US housing market, which has seen the first countrywide fall in prices in decades.