Panic selling on Wall Street

Panic selling on Wall Street sent share prices tumbling on both sides of the Atlantic last night as fears of higher US interest rates sent tremors through the markets.

Both the blue-chip Dow Jones Index and the technology-based Nasdaq index suffered huge losses after official figures showed that America's longest-ever boom is pushing up prices in shops and stores.

By lunchtime in New York, the Dow had fallen more than 350 points, while the Nasdaq was suffering its fifth successive decline and was down by more than 200 points.

Wall Street jitters quickly spread to London, sparking broad-based selling which left the FTSE index of leading shares down 178.9 points at 6178.1. The Techmark 100 index dropped 5.2% to 3,528, ending a miserable week during which it lost nearly 20% of its value from the previous Friday's close.

In New York, where the Nasdaq has dropped 1,000 points in a week and lost almost a third of its value since early March, analysts said many small investors were being forced to liquidate holdings to pay margin calls - shares bought with borrowed money.

Recent data showed a hefty increase in margin calls over the past six months, but the trend has left investors vulnerable to a bear market, with on-line brokerages automatically selling shares bought on credit as prices have fallen.

Analysts said the enforced sales and the new mood of fear meant that the declines were becoming self-feeding. "It was a momentum market on the way up, it is a momentum market on the way down," said Nick Sargen, chief investment strategist for JP Morgan.

Alan Greenspan, the chairman of the Federal Reserve, made no mention of the recent market turbulence during a speech in Washington.

However, the 22% drop in the Nasdaq during the past week - bigger than the fall in the Dow Jones Index during the 1987 stock market crash -will cast a shadow over the meeting in Washington today of finance ministers and central bankers from the Group of Seven industrial nations.

The International Monetary Fund warned earlier this week that "very high stock market valuations around the world" posed one of the biggest threats to continued global growth, noting that the high valuations put on technology stocks might "reflect unrealistic expectations of future earnings growth that have been nourished by the now record-long expansion in the US".

The trigger for yesterday's meltdown was the release of inflation figures by the US government showing consumer prices in March rose 0.7% - higher than the 0.5% the markets had been expecting.

Although part of the increase was due to dearer fuel as a result of higher oil prices, the underlying increase of 0.4% was double what dealers were anticipating, and prompted speculation that Mr Greenspan might raise interest rates by half a point when the Fed meets next month.

At its peak in March, the Nasdaq stood at 5,048.62 following an 86% rise in 1999. Analysts said there was now a belated recognition that valuations had become unrealistic.

But red arrows on screens did not deter the planned demutualisation of the Nasdaq. The National Association of Securities Dealers, parent of the hi-tech market, said yesterday the majority of its member firms had voted in favour of spinning off the Nasdaq.