Traders are heading into one of the most depressing weekends in living memory after the world's economies suffered further blows to cap their worst week in years.

First the euro and sterling fell heavily against the dollar on fresh fears that collapsing credit markets are thrusting Europe headlong into recession.

Then estate agents reported more gloom in the slumping UK housing market, warning that it could take three years to recover.

And now Wall Street traders are braced for a second day of heavy falls on the US stock markets after the country's unemployment rate leapt towards a five-year high.

Sterling dropped to a two-and-a-half year low against the American greenback at $1.7616 this evening. The euro was at $1.4240, compared with $1.4325 yesterday, after falling to an 11-month low against the dollar in Tokyo, also faceing a strong rally by the yen, Japan's currency.

The falls followed bearish economic comments by Jean-Claude Trichet, the president of the European Central Bank, which tightened its criteria for exchanging assets with Europe's cash-strapped banks yesterday, prompting worries that another financial services provider might spiral into crisis as lenders find it hard to secure capital from the wholesale markets.

Meanwhile, hopes that the housing market might recover quickly from its current slump were rendered still more distant as Savills, an estate agent which specialises in selling upmarket properties in the South East and London, predicted that conditions would not improve until 2011.

The company blamed restrictive mortgage conditions for the delay to any market recovery, citing the Financial Services Authority's report in July that a lack of availability for mortgages will persist through to the end of 2010.

Savills said today that its forecast that house prices will fall by 25 per cent over this year and next was looking like an increasingly safe bet.

The extent of the problems in the housing market was underlined further by forecasts that up to 1.3 million British homeowners could find themselves in negative equity - when mortgage debt is higher than the value of a house - if prices fall and the economy moves into recession. If true, the prediction, made by leading banking analysts, would mean that more than 10 per cent of the nation's homeowners would be sitting on properties worth less than they paid for them.

"Our estimate is for 25 per cent to 35 per cent house-price falls from their height...resulting in up to 1.3 million households, or 18 per cent of mortgages by value, in negative equity under our recession scenario," said Bruno Paulson, senior analyst at Sanford Bernstein, the research house.

Mr Paulson said that house price falls would be "far worse" than in the last economic downturn in the 1990s and could have a huge negative knock-on effect for the UK's mortgage lenders.

Faced with continued evidence that the economy is heading for a technical recession, analysts have begun to adjust their forecasts for the plight of the nation's homeowners.

Last month, Standard & Poor's, a credit agency, said that one in six homeowners in the UK will fall into negative equity by the end of next year if house prices fall by a further 17 per cent. Morgan Stanley estimated in April that house price falls of 15 per cent over the subsequent 24 months would put 1.2 million people into the red with their property values.

But if price falls of 25 per cent are sustained, that would put two million into negative equity, analysts at the investment bank said.

Much of the global economic crisis has been traced back to the sub-prime mortgage market in the United States, where employers slashed their headcounts in August for the eighth month in a row, according to the US Labour Department.

The unemployment rate was worse than expected, at 6.1 per cent, after 84,000 jobs were lost in August with almost every big employment sector taking the axe to staff. Analysts had forecast a fall of 75,000.

US manufacturers led the firing spree, handing out redundancy notices to 61,000 staff last month, the most for more than five years. The effect of the collapse of the housing market saw a further 8,000 jobs go in the sector, while 53,000 staff went in professional and business services as the nation's stricken banking groups scaled back their activities and cut jobs.

America's Dow Jones industrial average fell 128.4 points to 11,059.3, after closing three per cent down yesterday when it emerged the number of people claiming jobless benefit increased. The FTSE 100 fell 123.1 points to 5,239 in afternoon trading.

A drop on Wall Street would cap a torrid day for dealers in Europe as fresh fears about the credit markets stoked fears that the Continent was heading firmly into recession.

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