Global financial markets tumbled on Monday amid growing investor concerns about the US Federal Reserve potentially putting up interest rates in response to surging inflationary pressures.

Share prices fell back on both sides of the Atlantic with the FTSE 100 shedding 40 points, or 0.5%, in London, to finish the day at 7,445, while stocks fell by a more substantial margin on Wall Street as traders bet on the American central bank leaping into action from as early as March to tackle high inflation rates.

On a day of selling pressure around the world, the Nasdaq index slumped into correction territory, defined by financial investors as a drop of more than 10% from a previous peak, amid a sell-off in US tech stocks from an all-time high reached in November.

Housebuilders were among the biggest fallers in London after the UK government announced a £4bn package forcing developers to help remove dangerous cladding from buildings in the wake of the Grenfell Tower disaster in June 2017.

Shares in Persimmon and Barratt fell by about 5%, while Taylor Wimpey and Berkeley dropped 3.5%.

The gyrations come as financial markets worldwide adjust to the prospect of central banks ramping up interest rates in response to soaring cost of living, despite weaker levels of economic growth at the outset of 2022 after the emergence of the Omicron variant of Covid-19.

The Dow Jones Industrial Average fell by 1.5% on Monday afternoon in New York, while markets in France and Germany finished the day down more than 1% amid heightened investor caution worldwide.

US government bond yields hit a two-year high as investors bet the Fed could raise rates from as early as March, in a jittery trading session ahead of official US inflation data due on Wednesday. US inflation surged to 6.8% in November, the highest level since 1982.

Minutes released late last week from the latest Fed meeting in December showed officials considered whether interest rates needed to rise “sooner or at a faster pace” in response.

Inflation in the UK reached 5.1% in November and is expected to peak close to 6% this spring, driven by an expected sharp increase in household energy bills this April amid soaring wholesale prices.

Despite weaker UK growth in recent months amid supply chain disruption and rising coronavirus infections, the Bank of England is expected to steadily raise interest rates from the current level of 0.25% to more than 1% this year as the central bank seeks to quell inflation.

Chris Beauchamp, chief market analyst at IG, said: “Investors seem, for the moment, to have entirely lost their appetite for stocks.”