News In Depth
Greek poll panics world markets
Greece's shock plan to hold a referendum on the eurozone rescue package triggered a slump on world markets.
The FTSE 100 Index in London fell more than 2%, or 122.7 points, to 5421.6 after Greek prime minister George Papandreou's unexpected move cast fresh doubts on last week's much-heralded proposals to protect Europe from economic collapse.
Barclays was down 9%, while taxpayer-backed banks Lloyds and Royal Bank of Scotland were down 6% and 8% respectively amid fears that Greece could default on its debts if it does not accept the plan.
The gloom intensified when a closely-watched survey showed the UK's manufacturing sector slipped into decline in October, triggering fresh fears that the economy could slide back into recession.
David Jones, chief market strategist at IG Index, said: "The decision by Greece to hold a referendum on the bailout is a shock to investors who thought that we were finally nearing the end.
"It raises the prospect of the crisis dragging on further still, continuing the uncertainty for stock markets."
There were even bigger losses on European markets, where the Cac-40 in Paris and the Dax in Frankfurt were down 5%, while the Italian leading shares index was down nearly 7%.
The Dow Jones Industrial Average in the US was down more than 2% at the time the market closed.
The dismal opening in Europe followed a weak session in Asia where fears over the viability of the three-pronged EU rescue deal and weak Chinese manufacturing data troubled investors.
Last week EU leaders agreed with banks a 50% "haircut" on Greek debt and to boost the eurozone bailout fund to one trillion euro (?870 billion), which follows an earlier decision to shore up banks' finances.
But Greek leader Mr Papandreou threw a spanner in the works last night when he announced his debt-strapped country will hold a vote on whether to accept the deal next January.
The decision followed large-scale protests in Greece against austerity measures demanded by the European Union but analysts have warned a "No" vote could have a serious knock-on effect.
Jordan Lambert, trader at Spreadex, said: "Considering how persistently Greece and Germany have pushed for this long-awaited deal, it seems quite unnecessary to risk undoing all the progress to date."
The Office for National Statistics revealed that GDP grew 0.5% between July and September, ahead of City forecasts of around 0.3%, but this did little to cheer traders.
The latest twist to the debt crisis followed growing uncertainty over the aid package, which initially triggered a surge on world markets as traders drew hope from the proposals.
The funding of the deal came into question after reports emerged that the Chinese government may not contribute as much money to the one trillion euro bailout fund as previously hoped.
A raft of weak eurozone data yesterday underlined the challenge facing policymakers who are fighting to solve the crisis.
Stubborn inflation, high unemployment and downgraded forecasts from the Organisation for Economic Co-operation and Development added to the waning optimism.
Meanwhile, international broker MF Global emerged as the first major casualty of the eurozone's debt woes after it filed for bankruptcy protection in the US.
Concerns about the company's holdings of European debt caused its business partners to pull back last week, which led to a severe cash crunch, the company said.
Elsewhere, the China Federation of Logistics and Purchasing said its monthly purchasing managers index fell an unexpectedly large 0.8% to 50.4, just above the 50-level that signifies expansion.
The figures raised fears of a slowdown in Chinese demand and hit the FTSE 100's miners, including copper giant Antofagasta and Anglo-Swiss firm Xstrata.