Banking stocks were routed again yesterday as fears over further fall-out from the global credit crisis stalked equity markets - overshadowing news of a leap in US employment which might have been expected to boost share indices significantly.

Shares in US investment bank Merrill Lynch had plunged by as much as 12% at one stage yesterday - hammered by allegations in the Wall Street Journal that it had struck deals with hedge funds to delay write-offs related to the US sub-prime mortgage crisis. Merrill said it had "no reason to believe that any such inappropriate transactions occurred".

The UK's FTSE-100 index of leading shares, which had tumbled 135.5 points on Thursday, lost a further 55.5 points to 6530.6 yesterday. It had plunged as low as 6483.4 points during yesterday's session.

New York's Dow Jones Industrial Average finished up a meagre 27.23 points at 13,595.10 last night, even though the American Labour Department reported a seasonally-adjusted leap of 166,000 in US non-farm payrolls during October which was more than double the 80,000 rise predicted on Wall Street. This jump might have been expected to provide a major boost to global stock markets, by soothing fears that the world's largest economy could be headed for recession, but traders appeared more spooked by the spectre of the credit crisis. The Dow's gain paled into insignificance relative to its 362-point plunge on Thursday.

Shares in London-based Barclays tumbled a further 5.9% yesterday, having dropped by 5.4% on Thursday, amid unsubstantiated market talk of funding worries and vague speculation that it was telling analysts to trim profit forecasts.

Barclays declined comment. But the Bank of England said it had not made any emergency loans through its penalty-rate, standing facility on Thursday, a source which was tapped twice by Barclays during the summer for technical reasons.

And John-Paul Crutchley, banking sector analyst at Merrill Lynch in London, declared in a note: "Barclays' shares dived this morning on market speculation that the company was facing liquidity troubles and had approached the Bank of England for funding and that it was also guiding down market estimates. At the risk of tempting fate, both of these stories look like a Friday bear raid in a skittish market."

Crutchley noted Barclays had continued its share buy-back programme on Thursday - which he did not believe would be happening if there were any discussions with the Bank of England about liquidity support.

In terms of Barclays' message to analysts, Crutchley said: "In terms of current trading, while the company is out on the road meeting investors, we understand the message is consistent with that given at our (Merrill Lynch's) banking conference in October, when the bank reaffirmed the 15% to 20% target growth rate in Barclays Capital and operating trends elsewhere in the business."

However, the current psychology of markets seemed to be writ large in the extent to which Barclays' shares fell on unsubstantiated rumour.

Simon Ward, chief economist at New Star Asset Management, highlighted signs yesterday that the UK's banks had provided "massive support" to the likes of off-balance sheet vehicles and hedge funds during a global credit market crisis which kicked off in earnest in August.

He said: "Third-quarter figures on bank lending by sector released by the Bank of England today suggest banks provided massive support to off balance sheet vehicles, hedge funds and other financial intermediaries during the August/ September market dislocation. The chart aggregates the flow of new sterling lending to three industries: other financial intermediaries', fund management activities' and other auxiliary activities'. The third-quarter total of £41bn is a record and amounts to 19% of the outstanding stock of loans to these industries - equivalent to a 99% annualised growth rate."

The credit market turmoil has its roots in massive default on home loans by US households served by the sub-prime mortgage sector. These home loans were parcelled up and sold around the globe in the form of securities backed by the income streams from these mortgages.

Merrill Lynch's shares closed down nearly 8% last night, even after its response to the Wall Street Journal report.

The US investment bank said in statement: "This morning, an article in the Wall Street Journal about Merrill Lynch & Co Inc, relying on unidentified sources, speculated about inappropriate transactions that may have been designed' to avoid write-downs that might have been' required earlier in the year. The story is non-specific and relies on unidentified sources. We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."

The pound yesterday hit a fresh 26-year high against the beleaguered dollar, touching $2.0896 during trading.