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Alistair Darling called on G7 nations today to get behind a global rescue plan to rescue the banking sector as the FTSE 100 endured its steepest one-day fall since the crash of October 1987.

Speaking ahead of an emergency meeting of G7 finance ministers in Washington, the Chancellor said that he hoped the talks would produce concrete agreements on the need to protect savers, recapitalise banks and provide liquidity to markets.

Earlier, in a televised statement from the White House lawn, President Bush had promised concerted international action to tackle the crisis. "The world is sending an unmistakable signal: we're in this together and we'll come through this together," he said.

That was not enough to calm nerves on either Wall Street or Europe, where investors appeared to have resigned themselves to an impending worldwide recession.

After yesterday's drastic sell-off, the Dow Jones Industrial Average had fallen 500 points, or just over 6 per cent, in the first five minutes of trading before a sudden rally that pulled it back into positive territory in under an hour.

That rally was shortlived: the Dow Jones index shed 200 points, or around 2 per cent, as Mr Bush spoke and continued to drift after that.

The FTSE 100 index of leading London shares closed 366 points down at 4,947.78, a fall of 8.48 per cent, its largest one-day percentage fall since October 20, 1987.

In his statement, Mr Bush made clear that a $700 billion US bank bailout was not limited to the purchase of "toxic assets" but could also involve taking equity stakes in ailing banks, as Mr Darling is planning to do in Britain.

"The plan we are executing is aggressive," Mr Bush said. "It is the right plan. It will take time to have its full impact. It is flexible enough to adapt as the situation changes. And it is big enough to work."

He went on: "This is an anxious time, but the American people can be confident in our economic future. We know what the problems are, we have the tools we need to fix them, and we’re working swiftly to do so."

Wall Street's shocking opening dragged down other world markets, including the FTSE 100, but in many markets – including Russia, Iceland, Austria, Romania and Ukraine – trading had already suspended to stem losses. Russian officials said that both that country's major exchanges were closed indefinitely.

Japan had already suffered its worst one-day fall since the crash of 1987 as Asian bourses followed the overnight fall on the Dow. In Rome, Silvio Berlusconi, the Prime Minister, told reporters that there was "talk of suspending markets for the time needed" to rewrite the rules of international finance - only to backtrack on the comment.

The market carnage – the worst of the current crisis – was sparked by a sudden sell-off on Wall Street last night when the Dow Jones Industrial Average fell 678 points, or 7.33 per cent, to 8,579. A year ago it had reached a record high above 14,000.

"The panic and the fear we’re seeing is mind-blowing. It looks like the market is pricing in a depression," said Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey.

"One gets the feeling that this market is now strictly confined to the brave," added Chris Hossain, senior sales manager at ODL Securities.

The meltdown looked set to help focus the minds of the G7 ministers as they meet this afternoon to search for a co-ordinated response.

High on the agenda will be the British proposal for a co-ordinated approach similar to taht announced on Wednesday by Mr Darling and Gordon Brown, involving a £50 billion plan to recapitalise ailing banks backed up by a further £450 billion in liquidity funding and loan guarantees.

US officials have already signalled that they too may take equity stakes in ailing banks instead of simply buying "toxic" sub-prime mortgage debt in a $700 billion bailout and Germany appears poised to follow suit.

The other key part of the package – guaranteeing interbank lending – could also be adopted more widely at the G7 ministerial.

On the currency markets, sterling fell victim to the lack of confidence in the City. The pound fell to a five-year low of $1.6793 in overnight trading as investors continued to shift funds into US Treasury bonds.

Nor was the currency helped by figures showing growth stuck at 0.0 per cent for the period between April and June, its worst quarterly performance for 16 years. The economy is widely forecast to slip into recession in the second half of the year.

Analysts said that sterling was also being hurt by the increasingly heated row between Britain and Iceland over the fate of more than £1 billion of UK savings locked in accounts at collapsed Icelandic banks and who should compensative account holders. Mr Brown on Wednesday used anti-terrorism laws to freeze Icelandic assets in the UK, a move condemned by his Iceland counterpart, Geir Haarde, as a "completely unfriendly act".

"The Iceland crisis is fuelling the fear and lack of confidence; that investors are already feeling about Britain," said Tim Clayton, chief strategist at Investica.

The situation is far more serious, however, for Iceland, which grew rich on cheap credit but has now been forced to beg Russia for funds. The entire country, except for the singer Bjork, was put for sale on the eBay auction site, offering buyers "a habitable environment, Icelandic horses and admittedly a somewhat sketchy financial situation".

Bidding started at just 99p.

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