THE latest shockwaves in the credit crisis engulfing the global financial system wiped £51bn from the value of the UK's biggest companies yesterday.

On a dramatic day which saw the Bank of England pump an extra £5bn into frozen money markets, London's FTSE 100 Index tumbled 3.9%, or 217.3 points, to close at 5414.4 - its lowest level for more than two years.

The sell-off was sparked by the rescue and cut-price sale of ailing US investment bank Bear Stearns on Sunday.

US President George Bush intervened to help quell early Wall Street panic with praise for the US Federal Reserve's "strong, decisive action" over the crisis, which has drawn parallels with mortgage lender Northern Rock's woes.

In a rare Sunday move, the US Federal Reserve cut the rate at which it lends to other banks by 0.25% to 3.25% and set up a new lending facility to give investment banks short-term cash if needed.

Panmure Gordon banking analyst Sandy Chen said, "We interpret this as a clear indicator that other firms may be vulnerable."

Prime Minister Gordon Brown also moved to assure markets, saying in Parliament yesterday that Britain will continue to take "whatever action is necessary" to maintain economic stability.

A leading Welsh analyst last night said the UK economy was slowing down rather than going into recession, but he warned of difficulties to come should the credit crunch continue.

The Bank of England's £5bn funding injection aimed to ease a sudden freeze in overnight lending between banks following Bear Stearns' troubles.

It is the first such emergency operation since the start of the credit crunch six months ago, but cash-strapped banks were calling for almost five times as much funding leading to fears that the move would not be enough.

The rate at which banks lend to each other for three months also soared to 5.96% yesterday, its highest point this year. The Bank's official base rate is 5.25% but financial institutions fearful of losses are hoarding cash to boost their balance sheets.

In London, a raft of major banks were among the Footsie's biggest fallers, with Barclays off 9%, Halifax Bank of Scotland down 13% and Royal Bank of Scotland 9% lower.

The credit crunch has now seen the value of the UK's top 100 companies fall by nearly 20% since the Footsie reached seven-year highs above 6,700 in June last year.

David Jones, chief markets strategist at IG Index, said, "This just demonstrates the nerves which are still out there and I don't think we've seen the worst of it yet. Every time we think we have, we get another bolt from the blue."

However RBS senior Welsh economist Robert Gardner said the fundamentals in the economy, away from the money markets, remained strong.

With worries yesterday's events in the world's money markets will impact on people's wallets, Mr Gardner argued that employment remained strong and there was still growth.

He said, "All the indicators are that the slowdown is relatively modest. Of course, the indicators are backwards-looking and while they have come down they are still consistent with growth, albeit at a more modest level.

"That applies across the manufacturing and service sectors.

"This year the economy has expanded by 2%, which is hardly catastrophic. However, the longer the squeeze on credit goes on, the more difficult it will become.

"The worst spill-overs from the credit squeeze haven't happened at this point, which means it doesn't seem to be a major problem yet.

"But the longer it goes on, the greater its risks to the real economy. Policy-makers are taking steps as best they can to try and insulate the economy, they are being aggressive in the steps they have taken."

Mr Gardner said household spending had slowed but fundamentally remained strong, despite rising fuel and food prices, and wobbles in the housing market.

"A slowdown in spending is not a collapse," he added. "The labour market is still strong, with record numbers of jobs being created.

"When you look at the UK economy, it does seem to be a slowing rather than a complete recession."

Bear Stearns became the biggest victim of the crunch yet after being forced to seek emergency funding on Friday. It was bought by rival JP Morgan Chase for a cut-price $236.2m (£116.4m) on Sunday.

The company was heavily exposed to the mortgage-backed investments hit by the credit crunch. Two of its hedge funds collapsed in July last year in one of the early signs of the approaching crisis.

Last week rumours of problems at the business swept the market, leading to a cash crunch for the firm. The bank looks after millions of dollars for hedge funds, which began demanding their money back as the rumours grew.

But the company had no deposit base to fall back on, forcing it into seeking a rescue.

Oil prices spiked at a new record near $112 a barrel as fears over the US economy grew and the dollar weakened to a record low of 1.59 against the euro.

The Fed is set to cut interest rates again - possibly by as much as 1% - at its latest meeting today to spur on the world's largest economy, which is teetering on the brink of recession.

Mr Jones said yesterday, "Traders are expecting no let up from the current bout of volatility tomorrow, with all eyes still firmly on the US for tomorrow's interest rate announcement."

What you need to know about the cash crisis

The FTSE 100 Index plunged more than 2% yesterday as the fall-out from the cash crisis at troubled US investment bank Bear Stearns shook world markets.

Q: What has sparked the latest sell-off?

A: US investment bank Bear Stearns became the latest victim of the credit crunch when it was bought by JP Morgan Chase on Sunday for a cut-price $US236.2m (£116.4m) after being forced to seek emergency funding on Friday. The US Federal Reserve, in a rare Sunday meeting, cut its lending rate to banks to 3.25% from 3.5% and created another short-term loan facility for big investment banks in a bid to ease the pressure. Far from reassuring markets, the move was seen as further evidence that the financial crisis is deepening,

Q: What caused the credit crunch in the first place?

A: The credit crunch was sparked by high levels of defaults on sub-prime mortgages in the US. Banks sell mortgage packages on to investors in a process known as securitisation. The high level of defaults in the US has left investors with heavy losses, making them wary of mortgage-backed securities. So, the credit markets have dried up as financial institutions do not want to lend to each other and lenders are finding it harder to get mortgage debt off their balance sheets.

Q: What impact will yesterday's events have on mortgages?

A: No direct impact, but they are likely to exacerbate the trends that are being seen. The credit crunch has led to lenders becoming increasingly risk-averse. As a result, many products are being withdrawn, with no lenders offering 125% loans and only a handful offering 100% ones. Mortgage lenders are also want higher deposits from borrowers in order to qualify for their best rates. At the same time it has become more expensive for lenders to borrow funds themselves and this cost increase is being passed on to borrowers, with many firms increasing the tracker rates they offer to new customers outside of movements to the Bank of England base rate. The Council of Mortgage Lenders predicted at the beginning of the year that lenders would be unable to meet about a third of the demand for mortgages due to the problems they faced raising money.

Q: What should I do if I need to remortgage?

A: Start the process at least three months before the current deal expires. The mortgage landscape is very different now to what it was two years ago when many people last remortgaged, while interest rates are also considerably higher. Once people find a deal they should act fast to secure it, as huge demand for competitive rates is causing them to be pulled quickly as lenders struggle to keep up with processing applications, while the funding difficulties they face mean rates for new deals are being regularly increased, while firms also keep tightening their lending criteria.

Q: What is likely to happen to interest rates now?

A: The Bank of England is widely expected to cut rates at least twice more this year to 4.75%, while some commentators claim they could end the year as low as 4.25%.