More than €4 billion was wiped off the value of the Irish stock exchange (Iseq) yesterday as the Irish market put in one of its worst ever performances on the back of negative sentiment overseas.

The Iseq ended the day down 3.5 per cent, its largest one-day decline since last June and, according to one Dublin trader probably one of its five biggest ever daily declines.

It wasn't alone either as the negative sentiment took hold around the world, with London's FTSE closing down 2.3 per cent and the US markets showing little signs of recovery as the day progressed.

The sell-off was initially sparked by a near 9 per cent drop in Chinese shares - their biggest decline in a decade - prompted by concerns that the government may pass rules to limit demand for stocks to halt the rapid economic growth being experienced in the region.

Sentiment was also exacerbated by concerns about Iran's nuclear programme, rising oil prices and the release of US government data showing a 7.8 percent drop in orders of durable goods.

A warning from former US Federal Reserve chairman Alan Greenspan that the US could face a recession this year did not help matters.

While declines were seen around the world, Ireland suffered worse than most, something dealers attributed to the fact that the Iseq has been outperforming its European peers of late.

As of the end of last week, the Iseq was up about 6 per cent so far this year and during last week it hit a record 10,000 before retreating back to trade in the high 9,000s. Yesterday, the index closed at 9,536.

Traders expressed surprise that events in China could have such a global impact, but saw it as a sign of the country's increasing influence on the global economy. The declines came only a day after the country's main index jumped to an all time high.

China has been one of the main emerging markets for many investors as its economy has grown strongly and the government has sold stakes in some of the country's biggest and most attractive companies.

However, the government has been looking at ways of slowing growth to stop the economy from overheating, and many investors are worried that it may lead to tougher regulations that will limit stock market investment.

At the same time, there are concerns that interest rates will have to be raised to rein in economic and price growth, further denting domestic demand for shares.

The question now is whether yesterday's declines were a blip on what has been a very positive horizon for the world's stock markets, or if this is the start of the correction some commentators had predicted.

Dublin traders were yesterday quick to point out that it was just one day and that the Irish fundamentals still look strong, with a spate of positive earnings results expected in the coming weeks.

Still, if negative sentiment lingers around the world, it will be hard for the Iseq to buck the trend.

Around the world, the falls were steepest in emerging markets, with Turkey dropping 4.5 per cent and Brazil's Bovespa index sliding 3.6 per cent by midday, New York time.

European shares saw their biggest one-day fall since February 2003, with the FTSE Eurofirst falling nearly 2.9 per cent.

Benchmarks slid in all 18 western European countries, with the FTSE 100 recording its largest fall since June. France's CAC 40 dropped 3 per cent, while Germany's DAX was down 3 per cent.

On Wall Street, the Dow Jones Industrial Average was 1.4 per cent lower at midday, while the S&P500 index was down 1.5 per cent.