Nearly £40bn was wiped off the value of the UK's blue-chip companies yesterday as fears about the US economy sparked a sell-off in world markets.

The turmoil was triggered by concerns about the level of defaults faced by US sub-prime lenders, who provide mortgages to people with poor credit.

The FTSE-100 was dragged 160.5 points lower to close at 6000.7 - its lowest close since October - after the Dow Jones Industrial Average opened with further falls to trade below the psychologically important 12,000 barrier.

This followed a two per cent fall yesterday, the Dow's second worst session of the year.

The declines shatter hopes that the London market had recovered from a sharp correction earlier this month, when the Footsie slipped below 6000 for a time over fears that the Chinese government was about to act to curb booming economic growth.

Market analyst David Jones said: "It all comes from yesterday (Tuesday) but if we had not had the Chinese thing a couple of weeks ago, it would not have had this effect. It is a more nervous market now.

"There is definitely potential for more volatility as there is a different feeling around the market now."

Banks bore the brunt of the London sell-off, but housebuilders with heavy exposure in the US market, such as George Wimpey and Taylor Woodrow, also saw their share prices fall.

Only a handful of stocks were in positive territory, with retailer DSG International, which owns Curry's, B&Q-owner Kingfisher and Argos-proprietor Home Retail Group faring best.

Howard Wheeldon, senior strategist at BGC Partners, said: "It is a genuine and much needed market correction based on genuine concerns that too high levels of high risk US lending over the past ten years may haunt markets for some time to come.

"The way we see it is that this will be a slow correction spread over many weeks with good days and bad."