STOCKS TUMBLED around the world yesterday as a wave of selling spread from Asia through Europe and the US as banks continued to reel from funding shortages and governments scrambled to stop a behind-the-scenes run on the world's banking system.

Irish shares lost €5 billion in value during a day of heavy trading, with the Iseq index of Irish stocks declining 9.9 per cent, as global markets fell sharply despite state guarantees to protect deposits in several European countries.

Trading in financial stocks was suspended in Iceland and Europe experienced its worst share decline since the October 1987 crash.

Shares in the four public Irish banks fell for the first time since the Government's €400 billion State guarantee was unveiled last Tuesday morning. Irish bank stocks were among the worst hit across Europe yesterday, with the Isef index of Irish financial shares dropping 17.6 per cent.

The State's largest mortgage lender, Irish Life Permanent, suffered the most significant decline, sliding 23 per cent to €5. Anglo Irish Bank fell 21.6 per cent to €3.98 while Bank of Ireland closed on €4, down 17.5 per cent on the session. AIB shed 14.6 per cent of its value to close on €6.40.

The declines bring Irish bank share prices back to roughly the level they were at in the middle of last week.

Anna Lalor, analyst at Goodbody Stockbrokers, said: "With the guarantee to the Irish banks it's hard to justify why they are going down so far, but anything is possible right now."

Equity markets slumped around the globe as the deteriorating conditions in the credit markets forced Germany to pledge €50 billion to rescue German property lender Hypo Real Estate.

In New York, the Dow Jones Industrial Average fell below the 10,000 mark for the first time since October 2004 while the FTSE 100 in London suffered its biggest one-day points loss ever.

Earlier in Asia, Japan's benchmark Nikkei 225 index plunged 4.3 per cent to a four-and-a-half year low, while other markets such as Jakarta suffered a 10 per cent drop on the day.

For the first time since the crisis started, emerging markets bore the brunt of fears. The MSCI Emerging Markets Index slumped 11 per cent, its largest daily decline since 1987.

"This has been the biggest day so far for the capitulation of the long emerging markets trade, which has been in the works for weeks," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Robert Zoellick, president of the World Bank, said the crisis in Europe and America could prove a "tipping point" for many developing countries, as falling exports and worsening credit conditions triggered business failures and banking emergencies.

The falls came despite a rash of government initiatives around the world, which seemed to have no positive effect on confidence, leaving investors to rush to the safety of government bonds.

European equities were pummelled as investors took no comfort from grand statements from the continent's leaders at the weekend promising a co-ordinated approach and followed by individual actions.

The FTSE Eurofirst 300 index had its third worst day ever, plunging 7.75 per cent.

In Latin America, equity markets headed for their worst day since the 1998 Russian crisis, hit by falling world raw materials prices and a stampede into US safe-haven bonds.

Trading was halted twice on Brazil's stock market as the Bovespa slumped more than 15 per cent, losing almost half its value since a high in late May.

Tony Creescenzi, strategist at Miller Tabak, said: "I believe that if the world's financial markets are again unstable tomorrow that the Fed will cut rates tomorrow and act as a circuit breaker." (Additional reporting - Financial Times service)