U.S. deadlock fuels FTSE tumble
Fears that the world's biggest economy could default on its debts sent the FTSE 100 Index to a fresh three-month low as markets worldwide came under pressure.
Anxious investors are beginning to fret that the political deadlock in Washington will not be resolved in time for the deadline to extend the country's debt ceiling on October 17, putting the US economy at risk.
Treasury officials warned last week that the US could plunge into recession if the debt ceiling was not raised.
In London, the FTSE 100 was down around 1%, reaching lows not seen since early July, with marked falls also across Europe.
The Dow Jones Industrial Average on Wall Street was likewise in the red, down by more than 0.5% following heavy declines on Monday.
The US impasse has resulted in a partial government shutdown since the beginning of the month, which has seen u p to 800,000 public service workers placed on temporary unpaid leave and all but non-essential government activities suspended.
The looming threat of a stand-off over the Federal debt ceiling could have even bigger consequences, with the US at risk of defaulting on some of its payment obligations unless Congress agrees to raise the federal borrowing cap by the deadline.
Michael Hewson, senior market analyst at CMC Markets, said US politicians "seem determined to take this right to the wire".
He added: "The lack of a larger stock market sell-off can best be explained by the belief that even if the US does miss a payment on its interest repayments as a result of this stand-off it won't be as a result of being unable to pay, but more a case of a temporary inability to pay, until the ceiling is subsequently raised."
Equities also fell as the International Monetary Fund downgraded its global economic growth forecast, although it lifted its UK prediction.
It now expects global growth of 2.9% this year, a cut of 0.3% from July's estimate.
In the UK, the world financial watchdog said it now expected to see growth of 1.4% this year rising to 1.9% in 2014, compared to its last forecast in July of 0.9% growth in 2013 and 1.5% next year.
Blue chip banks and miners were among those suffering on the FTSE 100 from the global economic uncertainty caused by the US standoff.
Marks & Spencer was also deep in the red in another day of share losses as concerns grow that its womenswear relaunch is failing to revive the chain.
The retail giant was down around 3% following falls of almost 3% yesterday as new market share data cast doubts on its clothing turnaround and City analysts downgraded its prospects.
The FTSE 100 closed 71.5 points lower at 6365.8, a fall of 1.1%.