The FTSE 100 index closed down 36.6 at 5,033.7, its lowest level since October 1998, but a modest decline by last week's standards.

But the quiet close for the blue chips belied a highly volatile session in which the FTSE 100 plunged well below 5,000 in the middle of a broad European sell-off.

The broader market showed the scars of a difficult day. The FTSE 250 plunged 110.7 to 5,750.0, its lowest since November 1999. The SmallCap fell 56.5 to 2,537.4, its lowest since June 1999. And the Techmark 100 dropped 25.48 at 1,340.83, a record low.

Early trading saw the FTSE 100 with only modest losses, suggesting that the weekend talk of a substantial sell-off may have been overblown. But as the morning wore on the selling pressure mounted and by mid-morning the index had dropped below 5,000.

On other days, the fall below such a prominent number might have been expected to trigger some bargain hunting but instead the decline accelerated. European markets were under pressure throughout the morning with some falling by 4 per cent at one stage.

At its worst level of the day, the FTSE 100 was down 174.4 at 4,895.9. That left the blue-chip benchmark almost 30 per cent below its peak of 6,930.2 on the last day of trading in 1999.

But while Wall Street opened lower, with the Dow Jones Industrial Average falling more than 100 points in the first quarter of an hour of trading, it quickly became apparent that New York would recover.

Footsie quickly recovered, leaping back above 4,900 and beginning a steady climb that took the index above 5,000 in mid-afternoon, eventually recording a modest closing loss.

Turnover was healthy, with 2.27 billion shares traded by the 6 p.m. count, but not sufficient to indicate a climactic market sell-off. Mr Richard Hunter of NatWest Stockbrokers said the sell-buy ratio among private investors yesterday was about 3.5 to one, with the market's weakness "drawing a lot of reluctant sellers into the market". However, he added volumes were still well below the 2000 peaks.