MORE than £40 billion was wiped off British shares yesterday after the historic downgrade of US debt fuelled fears of a fresh recession in the world's biggest economy, sending global stocks tumbling to the lowest level in more than a year.

The market turmoil created by the downgrade overshadowed relief on this side of the Atlantic that the European Central Bank was snapping up bonds of Italy and Spain, two troubled eurozone countries.

Yesterday’s dealing was the first chance for global investors to respond to Standard & Poor’s announcement, late on Friday, that it was reducing its credit rating for long-term US Government debt by one notch, from the much-desired AAA to AA+.

The move was a total surprise but came when speculators were already feeling nervous about a weak US economy, European debt problems and Japan’s recovery from its March earthquake.

The sell-off since the end of July has sliced $3.4 trillion off the value of world stocks, a sum equal to Germany’s national output.

In London, the Stock Exchange’s FTSE-100 benchmark index closed down 178.04 points, or 3.4%, to 5068.95, the first time in its 27-year history that the index has suffered falls of more than 100 points for four sessions in a row.

Stocks in eurozone markets fell to their worst levels in more than two years, falling by about 4%. The Frankfurt bourse’s DAX index was one of the big losers, finishing the day 312.89 points easier at 5923.27, a loss on the day of more than 5%.

“It’s worrying that the markets cannot sustain a relief rally,” said Louise Cooper, markets analyst at BGC Partners.

“Every time shares start to rally, they get smacked down by heavy selling.”

The London market lost 10% of its value last week as nearly £150bn was wiped off the value of the UK’s 100 biggest companies in its worst period of trading since the autumn of 2008 when Lehman Brothers, the US investment bank, collapsed.

After an hour of trading, the Dow Jones industrial average dropped 368.28 points, or 3.22% at 11,076.33. The Standard & Poor’s 500 Index shed 45.55 points, or 3.8%, at 1153.83 in the first 60 minutes of dealing, while the Nasdaq Composite Index fell by 105.68 points, or 4.17%, to 2426.73.

New York-listed stocks lost 8% of their value in a bloodbath last week – the biggest drop since the depths of the global financial debacle in 2008.

The volatility in European and US markets followed sharp falls in Asian stock markets earlier.

The Japanese Nikkei index was down 2.1% at the close, while the country’s Topix fell 2.2%.

The ECB buying lifted some peripheral bond prices.

Yields on five-year Italian and Spanish bonds slid by around 70 basis points, spreads against German debt narrowed and the cost of insuring Spain and Italy against default dropped.

The ECB’s bond moves followed criticism that the bank had not addressed pressure on Spain and Italy when it bought Portuguese and Irish debt last week.

Gold, a safe haven for investors, soared to a record above $1700 an ounce and crude oil fell more than $4 a barrel as concern over economic growth spread.

The London market’s FTSE volatility index, a gauge of investor fear, shot up by nearly 30%, having risen all last week.

The Euro STOXX 50 volatility index, Europe’s main fear gauge known as the VSTOXX index, was up 8% at a 14-month high, highlighting the recent surge in investors’ aversion for risky assets such as equities.

“The risk premium is pricing in something worse than a double dip (slump) such as the one seen in the United States in the 1980s,” said Benoit Peloille, an equity strategist at brokers Natixis.

Market players in London and elsewhere appeared to be unimpressed by talks at the weekend between industrialised countries aimed at safeguarding the smooth functioning of financial markets following agency S&P’s cut in its US rating .

“It won’t be long now before other ratings agencies follow suit, considering the state of the United States’ finances.

“One thing is for certain, and that’s that volatility will continue to remain high, making trading conditions difficult,” said Angus Campbell, head of sales at Capital Spreads.

Moody’s repeated a warning yesterday it could downgrade the United States before 2013 if the fiscal or economic outlook weakened significantly, but said it saw the potential for a new deal in Washington to cut the budget deficit before then.