In the wake of heightened concerns about new terrorist attacks and a possible debt default by Argentina, the news that consumer confidence in the United States had crumpled to its lowest level in more than seven years sent stocks plummeting when Wall Street opened yesterday.

The Conference Board, a New York-based private business research group, said its index of consumer confidence plunged for a fourth straight month to 85.5 in October, much worse than analysts had expected. With unemployment rising steeply in the wake of the September 11th attacks, a rebound in confidence was not expected anytime soon, the report said.

Confidence among American consumers - who drive two-thirds of the world's largest economy - is now at its lowest level since February 1994, and down from 97.0 in September.

The Dow Jones Industrial Index, which lost 3 per cent on Monday, was down a further 200 points within an hour of the release of the report yesterday morning and closed down 147.52 at 9,121.98. The Nasdaq, which lost 4 per cent on Monday, fell 1.89 per cent to close at 1,667.41.

European share prices also tumbled yesterday as evaporating US consumer confidence sent Wall Street reeling and prompted fresh concern about the darkening global economic picture. Some leading indices in Europe were more than 3 per cent lower by mid-afternoon after figures in Washington showed that US consumers were increasingly gloomy about the outlook.

The lowest point in the morning sell-off in New York came as the Director of Homeland Security, Mr Tom Ridge, repeated in Washington that a new terrorist attack could be expected in the coming week. Some analysts also attributed the bleak atmosphere on Wall Street to an erosion of trust in the effectiveness of the government's response to the anthrax crisis.

The plunge in consumer confidence comes on the eve of the publication today of third-quarter gross domestic product figures, which are expected to show that the United States is heading into recession.

"The economic outlook is becoming increasingly pessimistic, with consumer sentiment continuing to fall," said Ms Lynn Franco, director of the Conference Board's Consumer Research Centre. "Widespread lay-offs and rising unemployment do not signal a rebound in confidence any time soon."

Consumer confidence has in fact been deteriorating since long before the September 11th attacks. Last October, one in 10 Americans perceived business conditions to be getting worse; today it is two in 10.

A year ago, five out of 10 people thought jobs were plentiful; today only two in 10 share that view. In a sign that the 4.9 per cent US unemployment rate is rising, the report said that 20.7 per cent of people surveyed in October believed jobs were hard to get, compared with 18.8 per cent in September.

The Present Situation Index, which measures how consumers view the economy today, fell sharply from 125.4 to 107.6 and the Expectations Index for the next six months dropped from 78.1 to 70.8 in October.

Despite their growing pessimism, consumers said they did not expect to change their buying habits in the next six months and there was a slight increase in the number who predicted they would take travel vacations next year - though fewer will go abroad.

Wall Street is also under pressure from a series of downbeat company forecasts, undermining a rally last week based on investors' hopes that steep cuts in interest rates and a huge injection of government spending would stimulate a rebound in the economy. Investors are also worried that Argentina will default on its debts of $132 billion (€145.6 billion).