US markets are falling despite positive comments from the Fed

A large slide in Europe and Asia was compounded by a drop on US indexes. The Dow Jones and S&P 500 indexes fell 0.3%, while the Nasdaq lost 0.5%.

London's FTSE 100 index closed 0.9% lower. It has shed 5% in three days, wiping more than £80bn of its value.

The global sell-off was triggered by fears of a new tax in China on Tuesday, and has now spread to wider issues.

Shares fell 9% in Shanghai on Tuesday, their biggest daily reverse in 10 years, and dropped a further 87.99 points on Thursday, closing 2.9% lower.

On Thursday, Germany's Dax and France's Cac both fell 1.1%. Earlier in the day, Japan's Nikkei 225 index had closed 0.9% lower, while Hong Kong's Hang Seng slipped 1.6%.

Spreading out

Since Tuesday and China's tax worries, investors have become more concerned about the state of the US economy and strength of the mortgage market.

On Wednesday, figures from the US Commerce Department showed that the US economy grew at a slower-than-expected pace of 2.2% in the last three months of 2006.

Investors are still wondering if the storm is actually over or not

Masatoshi Sato, Mizuho Investors Securities

Send us your experiences Q&A: World stocks slump

Other figures showed that spending on new home building fell 19.1% during the quarter, the sharpest drop since early 1991, adding to worries over the state of the housing market in the world's largest economy.

"The biggest risk in the next few weeks is likely to come from the US data front and developments in the mortgage and housing markets," said analysts at JP Morgan Chase.

Losses in the US were trimmed slightly thanks to good manufacturing data that helped allay some of investors' fears but it was not enough to turn the market around.

"Right now, everything and anything is viewed in a negative light," said stock analyst Dick Green. "It will take a while for the fears to calm down."

Heady heights

At the same time, investors are questioning whether stock prices have climbed too high, too quickly.

A number of the world's main indexes have broken records recently, and analysts said that corporate earnings may not be good enough to underpin the gains.

It is not unusual for stock markets to have a significant correction, and then go on to even higher levels.

Last May, the UK's FTSE lost more than 9% in three weeks, before recovering and surging to its highest level in more than six years in February, 2007.

"Investors are still wondering if the storm is actually over or not," said Masatoshi Sato, a senior strategist at Mizuho Investors Securities.

"Aftershocks in some markets, where prices are overvalued, may be seen from now on. Volatile and sensitive trading is likely to continue at least until mid-March," he added.