Panic selling swept through share markets yesterday, commodity prices fell sharply and currencies in developing nations tumbled amid signs a global economic slowdown could be deeper than feared.

News of a contraction in the British economy raised fears of a worldwide slump stemming from the worst financial crisis in 80 years. China warned the outlook was grim. A survey of companies showed the eurozone private sector economy was on track for its worst performance since the recession of the early 1990s.

Large investors - particu- larly hedge funds - are responding to the turmoil by deleveraging, or trying to pay off their debts. Deleveraging involves selling stocks and other assets, and in turn, causing them to plunge in value.

Prices of commodities like oil, gold and industrial metals tumbled and rates on major currencies gyrated wildly, sending the dollar and yen to multi-year highs against European currencies such as the euro and sterling. US government bonds surged as investors sought out this traditional safe haven asset.

"The panic levels are now quite unseen," said Christian Gattiker, the head of equity research at Bank Julius Baer, a Swiss investment house that manages about $300bn (£200bn) globally. "It's difficult to have any words for this situation right now."

"People are scared to death," said Ted Weisberg, president of Seaport Securities, a Wall Street brokerage. "Confidence and transparency (in the markets) are missing."

European shares fell to their lowest close since mid-2003, with investors rattled by official data that showed that Europe's economy was plunging into recession.

The FTSEurofirst 300 index of top European shares fell 5.4% to close at 825.32 points, its lowest close since May 2003, and having sunk as low as 787.29 earlier in the session.

The index lost nearly 8% over the week, and has lost 22.4% in October.

Across Europe, Britain's FTSE-100 index closed 5% down, Germany's DAX was 4.96% off and France's CAC-40 fell 3.54%. UK traders said £48.9bn was wiped from the value of London's leading shares.

Banks bore the brunt of the selling frenzy. HSBC slumped 17.7%, hit by growing fears of a slowdown in emerging markets.

HSBC's fall was prompted by a Morgan Stanley price target cut to 580p from 630p and forecasting a 50% dividend cut for 2009.

Standard Chartered, also exposed to emerging markets, fell 15.8%. HBOS retreated by 17.7%.

France's Société Générale dropped 7.6%. Seven French banks have requested a total of 5bn in loans from a state refinancing vehicle.

On the credit markets, the interbank cost of borrowing sterling eased to 5.98%.

In New York, the Dow Jones industrials average opened with a fall of about 425 points. All 30 components of the blue-chip benchmark were lower. Before the US market opened, Dow futures fell by 550 points, the maximum amount allowed under trading rules, The Dow closed 312.30 points lower at 8378.95.

Emerging market economies and currencies also came under extreme pressure with investors pulling money out of countries in Eastern Europe, Latin America and Asia on fears vulnerable countries will not only be hit hard by the financial crisis but may also default on debt.

Both Russian stock exchanges fell dramatically, with blue-chips Sberbank and Gazprom down heavily over growing fears of a recession. The exchanges shut down early and will not resume trading until Tuesday as doubts grew over Russia's ability to avoid a recession and defend its currency.

The rouble slid further, touching a two-year low, as the dollar rallied on global markets, This prompted the Russian central bank to sell another $1bn-$2bn to support the rouble.

Analysts said Russia's credit rating faces a possible downgrade.

Central banks in Mexico and Brazil deployed billions of dollars of reserves to stem steep currency falls that are testing Latin America's hard-won economic stability.

Iceland reached tentative agreement with the Inter-national Monetary Fund for a $2bn loan over two years, an aid package that comes after the country's banking system collapsed amid the global credit crunch.

Asian markets were mauled, with Japanese, Indian and South Korean indexes slumping more than 9.5% each to end below crucial psychological milestones as fears of a global recession swept across the region.

Benchmarks in Hong Kong, Australia, Singapore and Taiwan dropped to their lowest levels in at least three years.

Japan's Nikkei 225 Average sank 9.6% to end at 7649.08, a closing level it has not seen since April 29, 2003. The benchmark is now valued at less than a fifth of its all-time high of 38,915.87, which it touched in December 1989.

The losses in Tokyo were led by Sony, which slumped by 14.1% to end at its lowest level since 1995, after the company cut its full-year profit forecast to 150 billion yen from 240 billion yen.

South Korea's benchmark stock index closed below 1000 points for the first time in more than three years and finishing its worst week on record.

The South Korean won extended losses.

The Korea Composite Stock Price Index plummeted 110.96 points, or 10.6%, to finish at 938.75, its lowest close since May 2005. The drop pushed the index to its worst weekly fall - 20.5% - since records began to be kept back in 1987.