Share prices in the City suffered their biggest fall since March today amid fears that a debt crisis in the millionaires' playground of Dubai heralded a new phase in the global financial meltdown and a double-dip recession in 2010.

With Alistair Darling admitting that he had been forced to rip up his already gloomy forecasts for the UK economy this year, the FTSE 100 index of leading shares dropped more than 170 points – wiping £44bn off their value.

The market turmoil – which saw jittery investors retreat to the traditional safe havens of bonds, the Swiss franc and the US dollar – followed news that the government-owned conglomerate Dubai World had asked its creditors for a six-month debt moratorium.

As concerns grew that a fledgling economic rally stimulated by rock-bottom global interest rates might have run its course, the price of crude oil fell by almost $2 a barrel and speculators shunned riskier markets in emerging countries. Banks were the hardest hit stock market sector, and shares in HSBC and Standard Chartered – which are exposed to a property crash in Dubai – fell heavily.

The chancellor said in heated Commons exchanges that the UK would return to growth at the turn of the year after its weakest performance in the postwar era, but analysts said the problems in Dubai increased the risks of a double-dip recession in 2010.

"The crisis in Dubai has brought up speculation about how many more skeletons might be left in the cupboard," said Richard McGuire, a strategist at Royal Bank of Canada in London.

Graham Turner, of consultancy GFC Economics, said: "It gives you a picture of the fact that credit problem persists, despite everything that's been done."

Governments have cut interest rates, created new electronic money and allowed budget deficits to reach record levels in an attempt to boost growth after the near-collapse of the global financial system, but Turner said the problems in Dubai were indicative of widespread malaise. "Despite having oil, it's still the case that many of these countries had explosive credit growth. It's very clear that in 2010, we've got plenty more problems in store."Investors had recently begun to recover appetite for high-risk, high-return assets, showing more confidence in the global economy, including emerging markets. Stocks and bonds had rallied since March, with the FTSE – which dropped by more than 3% today – showing a gain of 50%.

Andrew Clare, professor of asset management at Cass Business School, said: "This may be the first sign that people are thinking you can't get back to the debt-fuelled halcyon days of 2007.

"I think this is just part of a wider problem. I just don't understand the basis for the market rally: equity prices had gone too far. Investors are underpricing all the risks that are out there, and this is just one of them. Some of those risks are going to come home to roost, and this is just the first.

"And next year they're going to have the shock of realising that interest rates can go up as well as down; and you've also got places like the UK, where taxes are going to have to go up and public spending will have to be cut – and the US, too, has some difficult decisions to make."

Darling confessed to MPs todaythat the severity of the recession caught him by surprise, paving the way for a drastic cut in the Treasury's growth forecasts in his pre-budget report next month.

Despite expectations that output would expand by between 0.2% and 0.4% in the final three months of 2009 – the first growth in seven quarters – the chancellor will announce a 4.75% decline in activity in his pre-budget report - much worse than the 3.5% decline forecast in April's budget. The chancellor said today that "new data" showed the economy had been hit much harder than he had expected.

"At the time of the budget, my forecast for growth in 2009 was in line with the average of external forecasters. Since then, new data has shown that most economies, ours included, suffered a severe shock in the first quarter of this year," the chancellor told MPs.

The new 4.75% projection would imply a return to modest growth in the final quarter of this year, after a recession that has now lasted for 18 months.

George Osborne, the chancellor's Tory shadow, lambasted Labour's response to the crisis. "You say it was always obvious to you that because Britain had such a large financial sector we would be among the worst affected and that our recovery would be delayed. Why then did the prime minister say Britain would be leading the world out of recession?" he asked.