| 16.8°C Belfast

Markets move to red alert

Stock markets plunged into the red yesterday as European debt fears and military tensions in Asia spooked investors.

London's blue chip share index the FTSE 100 slumped 2.5% to end below the 5,000 mark - its lowest level for eight months.

Shares nose-dived as talk emerged that Spain would have to step in to salvage more banks, after it bailed out the small savings bank CajaSur at the weekend when its merger with a rival failed.

Military tensions between North and South Korea also weighed on investor confidence.

"Sentiment is on the floor, and confidence is shot to ribbons," said David Buik, a London-based market analyst at BGC.

"The banking sector is being hit by a double whammy, with the problems in Spain exacerbated by the ridiculous policy decision. Then you have the situation in North Korea, which is a bit scary, and makes for quite a toxic cocktail."

America's Dow Jones Industrial Average nose-dived in early trading, dropping 2%, while European markets were also badly hit. The Cac 40 index in France fell 3.5% and Germany's Dax slipped 2.7%.

In Dublin, the ISEQ ended down 3.8%, with AIB shares losing 12.8%, and Bank of Ireland falling almost 9%.

Sentiment in Dublin was not helped by an economist telling a Dail committee that the likelihood of Ireland becoming embroiled in a crisis similar to the one in Greece has risen to 25%.

Dan O'Brien of the Economist Intelligence Unit told the Oireachtas European Affairs Committee yesterday that a crisis is "a clear and present danger".

Ireland's "entirely inadequate" response to the crisis in 2007 and 2008 had "allowed a loss of credibility that hasn't been regained", he added.

The jitters over contagion, as well as the austerity measures introduced in the UK this week, hit sterling, which fell more than 1% against the dollar.

The euro has also taken a hammering - falling to 1.22 US dollars - amid fears that massive debts will cause defaults by weaker countries in the European Union.

The rumours about Spain followed comments from the International Monetary Fund on Monday that the Spanish economy needs comprehensive reform.

Recent falls have left the Footsie down nearly 15% in little more than a month, after reaching a 22-month high above 5800 at one stage in April. Last week alone, the market lost more than 200 points in just three sessions.