Continuing fears over the deteriorating world economy drove stock markets lower again yesterday, and for the second day in a row over £1 billion was wiped off the value of banking shares on the Irish stock market. However a strong recovery in New York last night may calm investors' nerves over the weekend.

The near 4 per cent fall in the Irish market was mirrored all across Europe but investors took some comfort from a strong rebound by the US market after the Dow Jones index fell by more than 100 points. By the time European markets closed, the Dow was trading more than 100 points above the overnight level and at the close in New York, the index was up 152.16 at 7784.69. . There was a feeling in some sections of Wall Street that the market may have touched its lows. On the Dublin market, Allied Irish Banks dealt as low as 840p before eventually closing down 60p on 870p while Bank of Ireland brought its fall over the past two days trading to nearly 15 per cent, with the shares down 76p to £10.25.

Smaller financial stocks were also badly affected with Irish Life off 12p on 448p, while Irish Permanent was 33p lower on 760p.

In London stocks plummeted as the Footsie index gave up 157.8 points or 3.2 per cent to finish at 4750.4. It was the third straight sharp market fall. Bank shares were sharply lower due to operators' fears of possible losses - not yet disclosed - due to dealings with hedge funds. Bank analysts are uniformly gloomy, seeing no support from investors despite the fact that many shares in the sector keep hitting new lows and are massively below their highs which were seen in July.

"It doesn't matter what anyone says, banks led the market and they are going to underperform when the market falls," said banking analyst Ian Poulter at Williams de Broe.

European stock markets took it on the chin in the first part of the Friday session, but some of them then managed a successful damage control effort, particularly Paris and Madrid - both of which eked out small gains on the day.

After beatings on Wednesday and Thursday, the European markets continued to fall yesterday morning, and analysts said one drop was leading to another in a financial world that had become irrational. Some panic selling hit the markets in the morning, mainly by institutional investors, and operators were powerless to stem the downward slide. Frankfurt rebounded in the afternoon, and the Xetra-DAX index, down by almost 6 per cent in the morning, finished the official session at 4014.31 points, off 1.84 per cent on the day.

The Dutch market fell by over 5 per cent after ING halved its 1998 profit forecast and sacked 1,200 people at the ING Barings subsidiary in Britain. ABN-AMRO caused another shock after the market closed as it disclosed that it also will not meet earlier profit forecasts.

Meanwhile UBS, Europe's biggest bank, lost its chairman, Mr Mathis Cabiallavetta, and confessed to gross shortcomings in risk management in its investment in US hedge fund Long-Term Capital Management. Mr Cabiallavetta departed along with three other senior executives as UBS tried to restore confidence.

Mr Mark Cunningham, of Bank of Ireland Asset Management, warned that while New York might have recovered somewhat, the outlook for share prices is still doubtful. "It could get worse," he stated.

He said that New York is suffering from a liquidity crisis because of forced selling by hedge funds and also by mutual funds forced to sell stock to meet redemptions by investors.

"In the Irish market there is no institutional interest and it will probably stay that way until it bottoms out." He emphasised that the recent collapse in the bank stocks did not involve any heavy selling, but instead shares were being marked down in very small volumes.