THE world economy was in turmoil last night as growing fears over war with Iraq fuelled panic on the stock markets.

All the major European markets registered heavy losses.

At one stage in morning trading, the value of leading shares on the London market fell to below half their peak of the dotcom boom of three years ago.

Last night, the FTSE-100 index closed down for the 11th successive day at 3480.8, its lowest level since October 1995, and wiping £29bn off the value of Britain's biggest companies.

Further falls are anticipated when trading opens this morning, in response to a turbulent day in New York, where the Dow Jones index fell below the 8,000 level.

Currency markets were also sent reeling with the US dollar hitting fresh three-year lows against both sterling and the euro.

Nerves will remain frayed at least until the State of the Union address by President Bush later this evening.

This is certain to contain Washington's response to the weapons inspectors' report and heighten nerves about a possible conflict with Iraq.

Insurance firms took a hammering, as analysts questioned their ability to sustain solvency if the value of shares fell much more. Royal & Sun Alliance, Aviva and Prudential each fell by between seven and eight per cent.

There are fears that the latest markets crisis could have serious consequences for the value of pensions and endowment policies.

"The effects of fear, uncertainty and shattered confidence hold the market in a vice-like grip of despair," said David Buik, of spread betting firm Cantor.

Commentators said markets were depressed because of the uncertainty over Iraq. They forecast shares would rally if the crisis was resolved peacefully or if an invasion took place.

There were some indications that fund managers were switching from shares to bonds, which are viewed as a safer bet in the short term.

Gold, seen as another safe haven, also benefited from the turmoil, reaching its highest price for six years.

Tom Carpenter, chief economist at Chevy Chase Trust, said: "Prior to the initiation of hostilities we could have very weak global stock markets.

"But once the war is launched, and as soon as there is credible evidence that the war will be short and casualties low, I expect big drops in oil prices and gold prices, a strengthening US dollar and a rally in the stock market."

Sir Howard Davies, chairman of the Financial Services Authority, said the past year had seen "some of the most difficult conditions experienced in financial markets in living memory".

Shadow Chancellor Michael Howard said: "Labour has imposed extra costs of £15 billion a year in red tape and taxes on business. So it is not surprising that corporate profitability is at its lowest level for a decade.