In the aftermath of a bailout for a major US hedge fund and a shock third quarter loss from Europe's largest bank, UBS AG of Switzerland, the UK's FTSE 100 dropped 2.36 per cent, Germany's Xetra DAX was down 3.23 per cent and France's CAC-40 index fell 3.46 per cent after being more than 4 per cent down at one stage. ``People are getting out fast -- they have no confidence in this market,'' said one Paris trader.

``Every time it rallies, the rug is pulled out from under it, and this has really kicked it in the teeth.'' Prices steadied in late morning ahead of the opening of US markets, but Wall Street was expected to move down again, led by the banks. The drugs sector was also undercut by a big fall in the UK's Glaxo Wellcome after a brokerdowngrade. Coca-Cola was also expected to be in focus.

It holds an analysts' meeting in New York on Friday which may deal with the impact of the emerging markets crisis on its fortunes. The dollar traded below 1.6650 marks, dragged down by stock market weakness and concern about potential losses to US financial institutions amid the global economic turmoil.

Remarks by Bundesbank President Hans Tietmeyer, speaking at an economic seminar before an informal meeting of EU economic and finance ministers in Vienna, added to pressure on the dollar. He said calls for global coordinated monetary action were ``over-simplified' and that stable exchange rates could not be politically determined. Asian markets were all weaker as Tokyo's Nikkei average closed down 3.39 per cent, pressured by renewed worries that legislation on vital banking reforms would be delayed.

In Zurich, the blue-chip Swiss Market Index SMI was pushed down almost five percent to a year low as UBS fell almost 18 percent to 300 Swiss francs bylate morning. UBS shares had already lost 10 percent on Thursday. The bank said it would post a third quarter loss of up to one billion Swiss francs after world market turmoil ripped into its profits in August. It said it had taken a write-off of 950 million Swiss francs for its investment in U.S. hedge fund Long-Term Capital Management (LTCM).

The fund, an investment firm specialising in highly leveraged speculative trades, had seen its capital dwindle away as a result of bad trades including on derivatives markets. UBS is part of a group of 15 international banks that agreed on Wednesday to rescue LTCM with a package of $3.75 billion. Shares in Credit Suisse Group , Switzerland's other global bank, also fell sharply. CS Group is also part of the LTCM package but said on Thursday the action was not changing its results outlook for 1998.

On Europe's biggest bourse, the UK's FTSE succumbed to intense anxiety about banks' exposure to hedge funds. Barclays led declines, falling nearly eight percent in earlytrade, followed by Natwest , down 5.4 per cent and Lloyds, off 4.6 per cent. German bank shares suffered extreme volatility in morning business. ``It's the UBS story again. Everyone is testing the limits with the banks this morning, seeing how far down they can go and still find buyers, then going back up when the bottom is reached,'' one Frenkfurt trader said.