Share prices in Europe and North America were back on the slide after France became the latest country to be sucked into the deepening debt crisis.

Amid rumours that France would follow the US in being stripped of its AAA credit rating Nicolas Sarkozy, the French president, said plans to reduce his country's budget deficit would be announced within the week.

Fears that French banks were in difficulties meant that the rally in shares prompted by the US Federal Reserve on Tuesday proved to be shortlived, with markets resuming the pattern of heavy selling seen since late July. Britain's FTSE 100 index suffered its fourth fall of more than 100 points in five days, dropping 158 points to close the day 3% lower at 5007 points.

Despite Tuesday's gain of 95 points, the FTSE 100 has now dropped by 866 points since July 29, wiping a total of £226bn off the value of the UK's biggest quoted companies.

Wall Street's Dow Jones Industrial Average continued to fluctuate wildly, with Monday's 635 point fall and Tuesday's 430 point rise followed by a drop of 520 points, or 4.6% .

The jittery mood sent investors piling into the safe havens of gold and bonds. Bullion rose to a record high, briefly breaking through the $1,800 an ounce level, while bond yields in both Britain and the UK dropped sharply on expectations that dismal growth prospects would result in ultra-low interest rates for two years.

In London, the interest rate on 10-year gilts fell to 2.47% in the biggest one-day drop since the Bank of England announced in March 2009 that it would pump £200bn of electronic money into the economy through quantitative easing. Mervyn King, the Bank's governor, said Threadneedle Street had become gloomier about the economy's prospects over the past three months and expressed concern about the recent market turbulence.

"There are a number of headwinds to world and domestic growth, not least the private and public debt overhang. And these headwinds are becoming stronger by the day," King said as he revealed that the Bank had trimmed its growth forecast for the UK to around 1.5% this year and 2% in 2012.

He added that in the view of the Bank's nine-strong monetary policy committee "the weakness in activity was likely to be somewhat more persistent than previously expected".

Against a backdrop of an economy that has grown by less than 1% in the past year, City analysts said there now appeared to be little chance of borrowing costs rising until the end of 2012 at the earliest.

King also stressed that the Bank would consider a fresh round of quantitative easing should there be a risk that the weakness of the economy pushing inflation significantly below its 2% target.

King said: "The greatest risks to the prospects for global demand come from the euro area and the substantial challenges faced by several member countries as they seek to ensure the sustainability of their fiscal positions and preserve the stability of their banking systems."

His comments came as the French government denied that it was about to have its debt downgraded while one of the country's biggest banks, Société Générale was forced to put out a statement insisting it was not in distress after its share price dropped by 20% at one point.

Jean-Louis Nakamura, chief investment officer, asset allocation group at Lombard Odier Investment Managers, said: "The current economic environment is showing us that while both the United States and eurozone have budget problems, the two aren't comparable. While the US suffered a one-off political problem, it doesn't have a deeper institutional issue. In contrast, the eurozone's structures for coping with its debt problems at the relevant monetary union level aren't even in place, let alone operational."