Share prices around the world fell sharply today and the dollar plunged as shockwaves from the collapse of US investment bank Bear Stearns swept through financial markets.

Wall Street opened almost 200 points lower this afternoon, at 11,760.67. There was a brief respite later with the Dow Jones index briefly moving into positive territory. By 5pm, however, it was back in the red with a loss of 87 points, at 11,870.

The FTSE 100 closed 217.3 points down, or 3.9%, at 5,414.4 - its lowest since November 2005. There were sharp falls throughout the rest of Europe and in Asia the Nikkei 225 ended the day down 3.7% at 11,787.51, its lowest level in two-and-a-half years.

Banking shares were particularly hard hit, with billions of pounds slashed from their stock market value. HBOS closed down more than 12%. Alliance & Leicester, Royal Bank of Scotland and Barclays also suffered sharp falls.

The Bank of England moved to stabilise the markets this morning, offering £5bn of three-day funds in a move designed to bring overnight interest rates down. Banks scrambled for the cash, asking for nearly five times more than was on offer.

The BoE said that along with other central banks it was "closely monitoring market conditions".

Shares in investment bank Lehman Brothers, which has been the subject of intense rumours in recent weeks, plunged more than 25% and there were sharp losses for Morgan Stanley and Goldman Sachs - all are due to report results this week.

The $2-a-share JP Morgan takeover of Bear Stearns was put together rapidly over the weekend, with the US authorities keen to tie up a deal before the Asian markets opened.

The US Federal Reserve took emergency action on Sunday, cutting its discount rate - the rate at which banks lend to each other - by a quarter of a point. It also said it would set up a new lending facility for investment banks - something it has not done since the Great Depression in the 1930s.

US president George Bush attempted to reassure the markets this afternoon, saying that the Fed had taken "strong and decisive" action.

"In the long run our economy's going to be fine. Right now we're dealing with a difficult situation."

But the Fed's actions failed to reassure the markets and traders remained in a state of near-panic, with many fearing that Bear Stearns will not be the last casualty of the credit crunch that has gripped the global financial system since last August.

In London, leading City figures said the scale of the crisis was virtually unprecedented: "It does scare me," said veteran trader Terry Smith, chief executive of specialist inter-bank broker Tullett Prebon.

"I have been working in finance in the City and worldwide for 34 years and I have never seen anything like this," Smith told BBC Radio 4's Today programme.

"I don't think anybody alive has seen events of this seriousness and magnitude affecting the financial markets."

He doubts that lowering interest rates will have any real effect: "High interest rates didn't cause this problem, so lowering interest rates isn't going to solve it. It is hard to see exactly what tools the authorities do have."

Russell Jones, head of fixed income and currencies global research at RBC Capital Markets, said the markets are "in uncharted waters, at least in the modern day context".

The Fed's activities over the last fortnight imply that a number of systemic risks are crystalising - "and this in turn implies a need for an extraordinary response," he said.

"If the US financial system is in as much trouble as it seems, it is a global problem and will require a global policy response."

The dollar extended its recent heavy losses, falling to around ¥95.72 at one stage, the lowest level against the Japanese currency since August 1995. Sterling was one of the few currencies to fall against the ailing dollar today, dropping to around 2.0024 and reflecting the prospect of aggressive UK rate cuts.

In its statement on the emergency funding, the Bank of England said the action was being taken "in response to conditions in the short-term money markets this morning," and said it would continue to act to ensure that the overnight rate is close to Bank rate.

Philip Shaw at Investec said the £5bn represents a "substantial sum" in what is the Bank of England's first "fine-tune" exercise since the Northern Rock crisis.

"Clearly the BoE is sufficiently concerned about the tightness of shortdated cash to take substantial action to add liquidity," he said. "However despite the size of the add, the initial response from UK interbank markets has been one of disappointment, in the sense that it is insufficient."

The situation is "very serious" he said, and "represents a new and unwanted twist to the credit squeeze".

Money markets moved to price in even more interest rate cuts than already expected from central banks.

UK rate futures are now pricing in a whole percentage point of base rate cuts by year-end. In the US, traders fully expect tomorrow's policy meeting to conclude with a whole percentage point cut in one fell swoop. Some even expect the move before the Fed's scheduled meeting.

Meanwhile gold, a traditional safe haven in times of turmoil, jumped by more than 3%, hitting a new record of $1,030.80 an ounce. Oil, reflecting the plunging dollar, spiked to a new peak of $111.80. Both later fell back, however, amid a sell-off of commodities on growing concerns over the state of the US economy.