Global stock markets tumbled on Friday amid fears that the US economy is facing a sharp slowdown as the first monthly fall in employment in four years made an interest rate cut this month all but certain.

The evidence of weakness in the jobs market shocked investors and immediately raised expectations that the US Federal Reserve would be forced to cut interest rates by as much as half a percentage point this month to stave off recession.

Meanwhile, fears were heightened when Rodrigo Rato, managing director of the International Monetary Fund, said the organisation was cutting its forecast for world economic growth because of the subprime crisis and turmoil in financial markets. He said it was a “serious crisis”.

Stocks in the US and Europe suffered heavy losses on the back of the US job figures and the dollar fell sharply as investors sought government bonds.

In New York, the Dow Jones Industrial Average ended the day down 1.9 per cent at 13,113.4, while the S&P 500 lost 1.7 per cent to 1,453.55. In London, the FTSE 100 fell 1.9 per cent to 6,191.2, below its starting level for the year, and in Europe the FTSE Eurofirst 300 shed 2.2 per cent to 1,494.88. Shares in banks and financials bore the brunt of the sell-off.

In London, the FTSE 100 fell 1.9 per cent to 6,191.2, below its starting level for the year, and in Europe the FTSE Eurofirst 300 shed 2.2 per cent to 1494.88. Shares in banks and financials bore the brunt of the sell-off.

The dollar fell to $1.3770 against the euro, within a whisker of its record low in July. The weaker dollar helped prop up the price of gold, which broke through $700 an ounce, the highest in 16 months.

As bond prices soared, the yield on the two-year US Treasury bond fell as low as 3.88 per cent, a two-year low, while the 10-year US Treasury yield dropped below 4.4 per cent to the lowest since January 2006.

The data showed employers cut 4,000 workers, compared with Wall Street forecasts that about 110,000 jobs would be created. The government also said 81,000 fewer jobs were created in June and July than previously thought.

Hank Paulson, Treasury secretary, said the drop in payrolls was “not the kind of number I’d like to see’’, but added: “Data does not always move in a straight line, so occasionally you will find some surprises. The economy will continue to grow in the second half of the year.’’

There was unusually strong political pressure yesterday from Capitol Hill on the Fed to act. Barney Frank, chairman of the House committee on financial services, called for “a meaningful interest rate cut”.

Democratic senator Charles Schumer, chairman of the joint economic committee, said the job figures were a “punch to the gut of our economy”.

Additional reporting by Krishna Guha and Joanna Chung in London

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