The FTSE 100 dropped some 8.79 per cent this morning as official figures showed the UK economy had contracted faster than expected.

A 0.2 per cent shrinkage in GDP was expected by analysts, but the Office for National Statistics reported a 0.5 per cent drop.

At 12:23 BST the index stood at 3,789.74 – a drop of 298.09 points or 7.29 per cent – as it heads to new lows not seen even in this month’s banking crisis.

At lunch, no firms recorded gains and banks took the lion’s share of falls.

HBOS – volatile due to its depressed price – fell 16.62 per cent to 60.70p.

HSBC Holdings was down 13.48 per cent, Barclays fell 13.45 per cent and Standard Chartered dropped 13.33 per cent.

Miner Eurasian was down 13.98 per cent.

In Europe the Cac 40 was down 7.87 per cent and the Dax was down 8.05 per cent – starting a sell-off that started in Asia overnight where the Hang Seng was down 6.51 per cent and the Nikkei dropped 9.60 per cent.

Attention now turns to New York to see if the sell-off will continue – after the Dow closed up over two per cent last night.

Ryan Kneale, market analyst at BetsForTraders.com, said: “During the last week a strong market rally at the beginning of the week quickly fizzled out by mid week and the markets fell steeply.

“The general feeling is that we may be over the worst of the ‘credit crisis’ but the recession is only just beginning and this is really starting to hurt share prices now.

“We expect volatility to remain high over the next few months as recession fears build but once traders get over this fear we expect things to improve steadily.”