Shares sank to their lowest closing level for four and half years as US investors remain spooked by the prospect of accounting scandals.

The broad Standard & Poor's 500 Index lost 2.1% to end at its lowest point since January 1998.

The Dow Jones Industrial Average, the main blue-chip index in New York, dropped below 9,000 points for the first time since mid-September 2001, after losing 124 points during the morning's trading.

We're looking for something to turn the market around and there is nothing

Robert Arancio Lehman Brothers

By the end of the day it had recovered slightly to end down 102 points, or 1.1% at 9,007.

The technology heavy Nasdaq index fell to a five year low for the second day in a row, closing down more than 3% at 1,357.

Vivendi sparks fears

In Europe, persistent rumours over audit troubles at media giant Vivendi Universal piled the pressure on markets, with the FTSE 100 index down 139 points at 4,546 by the close.

France's CAC-40 index, which counts Vivendi among its leading stocks, closed down 162 points at 3,736.

Vivendi's shares lost more than one-quarter of their value, hammered also by downgrades from credit-rating agencies.

Tuesday's falls have wiped out modest gains made over the past few days, as traders came to terms with the fall-out from scandals at telecoms firm WorldCom and elsewhere.

Tremors on American markets were somewhat vague, based partly on fears about Vivendi - a major investor in the US - and partly on rumours of terrorist attacks on the 4 July holiday.

A series of warnings from brokerage firms, combined with lacklustre profit announcements by a few smaller companies, contributed to the gloomy mood.

Investors seek safety

"We're still in an environment where you have terrorism, a continual lack of confidence in U.S. corporate balance sheets... and you've got corporate profits that are a problem," said Matthew Johnson, managing director of trading at Lehman Brothers.

"All three of those things are contributing to the sell-off," he added.

Robert Arancio, head of Nasdaq trading for Lehman Brothers, said: "We're in new territory.

"We're looking for something to turn the market around and there is nothing."

Investors now are seeking safe havens, both in the bond markets - where returns are currently outstripping equities - and in non-US assets.

This in turn has battered the dollar, which has lost some 10% of its value against the euro this year.