The slump by the Japanese yen to an eight-year low against the dollar, continuing fears over the strength of US corporate earnings, threats of devaluations in China and Hong Kong and the latest warnings about recession in Japan all conspired yesterday to send stock markets into a tailspin with losses of 2-3 per cent the order of the day.

The Irish stock market fell 2.5 per cent to its lowest level since early March, with most of the losses once again concentrated on the major financial shares. The ISEQ Overall Index closed down almost 136 points on 4,950.35, and dealers believe it will take a reversal to Wall Street's slide to re-inject buying interest into the Irish market.

More than £1.5 billion was wiped off the value of Irish shares yesterday and the Irish market has now lost more than £4 billion in value since it reached its highest level on April 21st last.

The yen might have stabilised after its overnight fall to below 147 against the dollar, but there are few in the market who believe that the worst is over for the Japanese currency, given the starkness of the warning about the state of the economy from the Economic Planning Agency. "In short, the economy is in an exceedingly severe condition led by a prolonged slump," the agency stated.

Sustained weakness in Japan and particularly reduced overseas purchasing by Japanese manufacturers will have a severe impact on American corporate earnings in particular, says one section of the market. For that reason, earnings multiples that drove the Dow to its all-time high above 9,300 can no longer be justified, say the bears of the market. Those continued fears over corporate earnings sent Wall Street sharply lower once again and last night the Dow closed down 112 on 8462.85. The growing crisis in Japan and the slump in the value of the yen may also have knock-on effects on other major Asian economies with fears of a devaluation of the yuan sending Chinese stock prices lower while Hong Kong's Hang Seng Index fell 3.6 per cent to its lowest level in five years as investors dumped stock.

Reassurances by a senior Chinese central bank official failed to reassure the markets and Shanghai's B index fell 1.6 per cent to a record closing low.

In Japan a government spokesman said it was strongly concerned about the yen's fall against the dollar. "We are aware of the yen's falls in the Tokyo market today, and we are strongly worried . . . we are watching closely, and will take appropriate steps at the appropriate time," he told a news conference.

The yen managed to hold its ground against the dollar at just over 147 yesterday, but traders - by pushing the currency to an eight-year low - are gambling against intervention in support of the yen. One analyst said that only the fear of intervention had prevented the yen falling further.

Haruhiko Kuroda, chief of the finance ministry's international finance bureau, issued the now regular warning that authorities would act when necessary to check the decline.

"The yen's excessive weakness is undesirable and our stance of taking appropriate measures when necessary is unchanged," he said.

But markets were itching to sell the yen. They feared trouble in Prime Minister Keizo Obuchi's battle to pass legislation to salvage the finance sector through parliament, where the opposition controls the upper house, analysts said. In the last few days, speculators have been attacking several Asian currencies, and some investors expect the Hong Kong dollar to be cut loose from its US counterpart over the weekend.

The yen's drop over the last few days has maintained a feeling of mistrust of the region's currencies as a whole. A European bank broker said the yen will soon test the level of 150 to the dollar as financial circles display increasing scepticism that the new government can re-launch Japan's economy. In London, the FTSE fell to its lowest level since January, with a drop of nearly 155 points to 5,432.8. The economic situation in Asia and the sell-off on Wall Street were only two of the factors affecting sentiment in London. Britain's own economic woes, high interest rates and the consequent strength of sterling are also sending the markets lower. All the main European stock markets also suffered sharp losses in the wake of the crushing downturn across Asia.