Economic worries knock US markets

The news from the trading floor is not improving

Stock markets in the US have fallen sharply as the cumulative effect of a weak dollar, soaring oil prices and the credit crisis again eroded confidence.

The benchmark Dow Jones index of leading shares tumbled 360.92 points, or 2.6%, on a day of fresh volatility.

Banking stocks were widely sold as fears over financial problems facing Wall Street showed no signs of abating.

Morgan Stanley said exposure to bad sub-prime related investments had reduced its profits by $2.5bn ($1.2bn).

Sub-prime liabilities on its balance sheet totalled $6bn at the end of last month while the decline in value of these assets had wiped $3.7bn off sales in the past two months.

"It is expected that market conditions will continue to evolve and that the fair value of these exposures will frequently change and could further deteriorate," Morgan Stanley warned in a statement after the stock market had closed.

'Perfect storm'?

The slump in the US housing market and its knock-on effect on the banking sector is just one of several factors seen as dampening the US economy.

Oil prices are fast approaching $100 a barrel and are seen as being a real drag on economic growth in 2008.

Prices rose above $98 a barrel on Wednesday for the first time and although they later fell back to below $97, many analysts now believe the $100 mark will soon be breached.

Morgan Stanley is the latest bank to write down its sub-prime assets

Meanwhile, the dollar continued its steady decline against other major currencies after a Chinese government official said it might build up its euro-denominated foreign exchange holdings.

The vast majority of China's holdings are currently in dollars.

The Dow Jones closed trading at 13,300.02 while the Standard & Poor's index fell 2.9% to 1,475.62, its largest single daily drop since August.

Mortgage woes

Banking stocks were under the cosh as the fallout from the resignation of two of Wall Street's leading bosses in the past week still dominated the market.

Morgan Stanley's shares fell 6% while shares in Citigroup, whose chief executive Chuck Prince quit on Sunday after disclosing heavy losses related to bad mortgage loans, fell 5%.

Leading mortgage lender Washington Mutual said on Wednesday that the housing market was likely to remain depressed throughout next year.

"The soft landing we were anticipating quickly transitioned to a severe downturn," chief executive Kerry Killinger said.

The sense of unease was heightened by the decision by the attorney general of New York to issue subpoenas to leading mortgage financiers Fannie Mae and Freddie Mac.

The subpoenas were issued as part of his investigation into claims of a conspiracy to inflate the appraisal values of homes.

"It seems that every time there is any significant new headline that relates to the mortgage mess, that gets people spooked and the selling really starts to accelerate," said Eric Kuby, chief investment officer at North Star Investment Management.