Global equity and bond markets have fallen sharply after stronger-than-expected US inflation data rattled Wall Street and sparked fears of a possible rise in US interest rates.

The sell-off was triggered by the release of April's US consumer price index, a key inflation measure, which posted its fastest monthly growth rate since before the Gulf War in October 1990.

The overall figure rose 0.7 per cent in April, far outpacing market expectations, as a result of rising energy, clothing, transport and housing costs. The numbers knocked the shine off investors' glowing image of the US economy and dented complacency about interest rates ahead of next week's meeting of Federal Reserve policy makers.

While few economists expect the US central bank to tighten policy at Tuesday's meeting, arguing that it is too soon to respond to one month's data, many fear the figures point to higher rates in the coming months.

"I think the Fed will move to a tightening bias," said Mr Jim Coons, chief economist at Huntington National Bank. "However, I would not say a rate hike is imminent."

However, in Washington a White House spokesman said US inflation remained historically low and the April figures reflected a spike in tobacco and oil prices. "I think the figure was slightly above what the market expected but it was mostly based on tobacco and oil and the oil prices have already begun to dip a little bit," he said.

The news hit not just the stock market - with the Dow losing 193.87 points to close at 10,913.32, a drop of 1.75 per cent - but also hurt the dollar and US bond prices with the key US 30-year bond hitting a yield of 5.9 per cent, its highest level since May 1998, from 5.75 per cent on Thursday.

European markets followed Wall Street's downward trend with London closing down 2.4 per cent at its lowest level in three weeks while shares in Paris slipped by 2.15 per cent.

The Irish stock market followed the trend elsewhere, with the ISEQ index losing 1.7 per cent of its value as global stock markets took fright. Dealers said there was no real selling pressure in Dublin, although most stocks were marked down.

"Things weren't looking too bad until the CPI came out and then everything took a thumping," one dealer noted. However, he said the Irish market tended to lag such events, not lead them, and there could be follow-through selling next week depending on what happened elsewhere.

The Irish bond market also suffered in the wake of the US data but dealers said it fell in line with other European bond markets. However, the drop in prices does not augur well for the next stage of the National Treasury Management Agency's (NTMA) bond switching programme next week.

"They are exchanging one set of bonds for another so they will get a lower price for those bonds they are selling but the price at which they buy back will also be lower," one dealer noted. But she admitted that the sharp drop in prices would make investors nervous and less inclined to get involved in any sort of market activity.