US inflation and rate rise worries cause worldwide shares sell-off

A day of panic selling in the world's financial markets yesterday knocked $2 off the price of a barrel of oil, it provided the sharpest one-day fall in gold for 13 years and left shares in London at their lowest level since late last year.

Amid growing fears that rising global interest rates could bring a halt to the boom in asset prices of recent years, the toughest day for Japan's Nikkei index since the 9/11 terrorist attacks was followed by extreme nervousness in European markets.

The FTSE 100 index of UK blue-chip companies was down more than 150 points before bargain-hunting in New York brought a halt to the plunge in equity prices. But with data yesterday showing inflation for American firms rising, Wall Street is anxiously awaiting today's release of figures for the US cost of living.

Dealers said any further evidence of a pick-up in consumer price inflation would make a 17th successive increase in interest rates from the Federal Reserve an odds-on bet when the central bank meets at the end of the month, with the prospect that a quarter-point rise to 5.25% would not be the last.

Falling share prices were accompanied by renewed strength in the dollar amid speculation that the Fed's new chairman, Ben Bernanke, would seek to show the markets that he is taking no chances with inflation, despite evidence - underlined by weak US retail sales data yesterday - that the world's biggest economy is slowing.

"The Fed has consistently been beating the drum about inflation risk and we're seeing that resonate throughout the market: strength in dollar, weakness in equities, emerging markets and commodities," said Alex Beuzelin, foreign exchange market analyst with Ruesch International in Washington.

The FTSEurofirst 300 index of top European shares shed 2.2% to 1238.5 points, its lowest closing level since November 30, while the FTSE 100 was off 101.3 points at 5519.6, its lowest finish since December 2005. Oil and mining stocks were among the biggest losers as commodity prices fell sharply in anticipation that higher interest rates will curb both industrial demand and inflation.

After hitting a 26-year high of $730 an ounce a month ago, gold has lost 20% of its value. It fell by $25 to $580 in London yesterday and continued to weaken in New York. Silver lost 10% of its value yesterday, dropping to below $10 an ounce, while base metals used by manufacturers also saw hefty falls. Copper and zinc are both down 25% since their May peaks, with the former dropping more than 6% yesterday to $6570 a tonne and the latter 8% down at $2,900 a tonne. The prospect of economic weakness also took its toll of oil prices, with Brent crude trading at just over $67 a barrel.

A day of market turbulence started in the Far East, where the Nikkei suffered its biggest single-day points loss since September 11 2001, amid concern that a possible rise in US interest rates could impede Japan's economic recovery.

The Nikkei lost 4.14% to end the day at 14,218, its lowest close since November 16 last year. The Tokyo stock market has dropped about 20% since early April.

Ructions were felt in markets across Asia and in Europe ahead of the release this week of key US economic inflation data that the US Federal Reserve uses to set interest rates.

Fed officials have repeatedly warned that US inflation is too high, prompting speculation that the central bank will decide to raise interest rates at its policy meeting on June 28-29 - a move that would adversely affect US sales of Japanese products such as cars and consumer electronics.

The Nikkei was further jolted by the revelation by the Bank of Japan chief, Toshihiko Fukui, that he had invested 10m yen (£50,000) in MAC Asset Management before he was appointed governor of the central bank. The president of MAC, Yoshiaki Murakami, was arrested last week for alleged insider trading.

Mr Murakami, who has resigned from the firm is accused of buying shares in Nippon Broadcasting System (NBS) after learning in 2004 that the internet company Livedoor, which is the subject of a separate case of alleged accounting fraud, was about to make a bid for the media firm. The fund sold most of its shares in NBS after the price rose during Livedoor's ultimately unsuccessful takeover bid.