US stocks suffered their steepest points drop since the terrorist attacks of September 11 2001, as global investors fled risky assets after the biggest fall in Chinese shares for a decade.

The Dow Jones Industrial Average was down more than 500 points at one stage yesterday afternoon as concerns over Iran, worries about the US subprime mortgage market and a warning about a possible US recession from Alan Greenspan, former chairman of the Federal Reserve, punctured recent market optimism. There was a sell-off in higher risk credit markets and a rising yen signalled the beginnings of an unwinding of the global carry trade, where investors borrow in currencies with low interest rates to buy higher-yielding assets elsewhere.