The flight of equity capital into the security of American and British government bonds dragged most international stock markets sharply lower for the third successive day, as the chaos of the Russian economy continued to weigh heavily in the markets.

Losses were not as great as during Thursday's collapse, but dealers said the situation in Russia is now so bad that any recovery will be extremely fragile and that markets may have further to fall before there is any sustained recovery.

The Dublin market endured one of its most panic-stricken periods of trading yesterday morning, before buyers returned to the market tentatively to bring leading industrial and financial shares off their worst levels.

"There was a sense of panic in the Irish market for the first time since the Far East and Russia crisis began," commented one dealer, who added: "It was all very reminiscent of October, 1987, for a while."

After recovering from the early fall of over 5 per cent, Irish shares rebounded in midday trading before falling late in the day. The ISEQ Overall Index fell another 3 per cent with the best part of £1.5 billion wiped off the value of the market, leaving it at its lowest level since the end of January.

The early period in Dublin saw some extraordinary falls in the value of the leading shares with Allied Irish Banks down 10 per cent at one stage on 920p before it recovered to close down 45p on the day at 980p. Bank of Ireland dropped 80p to £10.80 before recovering to a £11.15 close. The major industrial shares were also volatile with CRH down 78p to 700p before it closed at 765p while Smurfit hit its lowest level for six years at 128p before ending 13p lower on the day at 130p.

The pattern was the same in London, where the FTSE-100 index was down close on 5 per cent in the early session, before recovering as bargain-hunters went into the market, after the New York market opened on a firmer note.

But trading was extremely volatile on the New York market, with the Dow Jones initially rising 80 points from its overnight position, then doing an about-turn to go 150 points below the overnight level before regaining some ground. At the close, the Dow was ..........

Major European markets halved early losses of over 4 per cent, bolstered by improved expectations for the Dow and some covering of short positions before the weekend. The markets remained extremely nervous as investors sought sanctuary from the domino effect of the financial chaos in Russia and fears of escalating problems in Latin America. The European markets had taken their early cue from the overnight falls on Far East markets where the Tokyo market fell to its lowest level for 12 years.

And the panic engulfing global markets may resume in earnest next week unless policy-makers in Russia or the Group of Seven industrialised nations demonstrate greater willingness to tackle the turmoil, analysts have stated.

For some, the most important figure in the current storm is Federal Reserve chief Mr Alan Greenspan. A few carefully chosen words from Greenspan indicating that the Fed does not now see a need to increase interest rates would be enough to end much of the nervousness seen on financial markets in the past week, analysts said. And unconfirmed rumours that the US and Europe might plan co-ordinated interest rate cuts in the months ahead was one factor supporting markets yesterday.

"The key is the Fed," said Mr Kevin Gaynor, economist at Warburg Dillon Read in London. "If Greenspan says the Fed will move away from its tightening bias, that will change the complexion of the markets."

Mr Greenspan and senior policy-makers from around the world are meeting in Jackson Hole, Wyoming this weekend for an annual academic conference sponsored by the Fed.

Speculation that the US central bank might be dragged into the global maelstrom intensified yesterday as events in Russia sent tremors through the world's industrialised and developing economies.

"As a short-term measure, that is the only thing that is going to stop the systemic risk from getting worse," Mr Gaynor added.

Further fueling such speculation, Germany's respected Ifo institute said sharp falls on global stock markets could be opening room for major economies to consider cutting official interest rates.