The sharpest fall in confidence since the September 11 attacks provided the first concrete evidence that Americans had taken fright at the build-up to war, and analysts said that the statistics raised the spectre of double-dip recession in the US.

Share prices tumbled in all major financial centres yesterday as dealers considered the potential impact of the slump on the rest of the world. Many European markets slid to their lowest level for six years and the Dow Jones Industrial Average dropped more than 100 points before recovering to close 51 points up as bargain-hunters moved in.

In London — where analysts are anxiously awaiting the February domestic confidence figures to be published tomorrow — fears of a big drop in American spending helped to send the FTSE-100 down more than 80 points to close at 3621.5. And as the Treasury said that it was considering introducing statutory powers to manage financial markets in the event of a September 11-style attack, the pound fell to a four-year low against the euro of 68.5p.

Economic concerns were compounded by a record fall in the amount companies spent on investment. Spending on technology, equipment and machinery dropped by more than 10 per cent last year — the biggest fall since records began 36 years ago — casting doubts over the Chancellor’s growth forecasts and prompting speculation about a further cut in interest rates.

Sir Edward George, Bank of England Governor, told MPs that the crisis in Iraq was the most testing that the Monetary Policy Committee had faced. “I think the uncertainties connected with Iraq are of a kind I can’t recollect,” he said. It was impossible to know what the economic impact of war might be, he told the Treasury Select Committee. “There are so many different scenarios and frankly we don’t know what the impact of any of them will be because it is a matter of degree.”

The slump in American consumer confidence caught financial markets totally unaware. Most analysts predicted a modest decline, but the 15-point drop in the US Conference Board’s index to 64.0 was comparable to the 17-point drop seen immediately after the September 11 attacks, far worse than any analyst had been expecting.

Ian Shepherdson, chief US economist at High Frequency Economics, said: “This is not an immediate disaster for the economy, but it will be if there is no resolution of the Iraq crisis in the next month or two.”

Paul Ashworth, international economist at Capital Economics, said: “War fears are clearly having a big impact on consumer sentiment, because recent evidence from stock markets and the labour market in no way warrant such a big drop.”

Economists predicted that the American public would become increasingly pessimistic about the economic outlook unless and until the Iraqi situation was resolved. When Iraq invaded Kuwait in 1990, US consumer confidence also fell sharply, bouncing back only after airstrikes began in the following year. Mr Ashworth said: “Confidence is unlikely to rise significantly while the uncertainty persists. In fact, consumers may become even more downbeat in March and April.”

With manufacturing in serious difficulties worldwide, both the British and American economies have become wholly reliant on consumer spending over the past 12 to 18 months. Analysts fear that a big drop in confidence in either country could hit high-street spending and with industry weak, this could be disastrous for the wider economy.

Mr Ashworth at Capital Economics calculated that, if American consumer confidence remained at its current low levels, high street spending in America may not grow at all in real terms in the first half of this year. “This is clearly very worrying since consumer spending has been almost the only thing keeping the economy afloat.”

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