PARIS : World leaders on Thursday insisted that the US sub-prime crisis would not cause an economic downturn but stock markets across the world plummeted again as investors appeared unconvinced.

US Treasury Secretary Henry Paulson admitted that American growth would be hit but said the world could weather the storm because it came "against a backdrop of a very healthy global economy with strong fundamentals."

French President Nicolas Sarkozy said he was confident the fallout from US credit markets would have no long-term effect on growth, while Australia's Prime Minister John Howard said the economy could withstand the shock.

But their words failed to convince stock markets.

They tumbled yet again, with London taking its biggest one-day fall since the run-up to the Iraq war in 2003 and Wall Street and Asian stocks sharply lower.

"There's a growing fear that the turmoil in the credit markets, along with rising investor fear, could start to undermine the global growth and strong company profits story, and the markets could be at the start of a negative spiral," said John Noonan, an analyst at Thomson IFR Markets.

Crude oil prices fell heavily as traders fretted that the market turbulence could crimp economic growth and demand for energy. And major currencies were also roiled, with the yen soaring against the euro and the dollar as players unwound risky bets.

Investors are worried about a global credit crunch as more banks and investment funds around the world reveal their exposure to the slumping US sub-prime, or high-risk, home loan sector, analysts said.

The fear is that banks will suspend normal lending practices as they move to cover their losses, thereby restricting access to credit for investors and companies.

Central banks across the world have since last week pumped tens of billions of dollars into the banking system, offering loans at lower rates to commercial banks to forestall a credit crunch that could damage economic growth.

The US Federal Reserve flexed its financial muscle again on Thursday, injecting 17 billion more dollars into the US banking system, while the Bank of Japan said it would release an extra further 400 billion yen (3.4 billion dollars) to calm frayed nerves.

The crisis stems from the US housing market, which after years of booming house prices and cheap credit is now in reverse, with loans becoming more expensive and house prices falling.

This has caused high numbers of mortgage defaults as borrowers, particularly sub-prime borrowers - people who have a poor credit history - struggle to make their repayments.

Dozens of US mortgage lenders have been put out of business and major US and European banks have taken a hit.

Countrywide Financial, America's leading mortgage lender, said on Friday it had tapped an 11.5-billion-dollar credit line to boost its finances.

Shares in Countrywide plunged 14.98 percent in New York as investors panicked over the latest sign that the crisis was widening.

Ratings agency Moody's Investors Service downgraded Countrywide's credit to its lowest investment-grade rating and warned all of the company's ratings remained under review for further downgrades.

President Sarkozy called for the Group of Seven (G7) most industrialised nations to take steps to improve oversight of world markets, but insisted that "these market movements will not lastingly affect the growth of our economies, which is strong."

US Treasury Secretary Paulson said that fears over the US mortgage market "will extract a penalty on the growth rate" of the US economy.

But "the economy and the markets are strong enough to absorb the losses" without provoking a US recession, he told the Wall Street Journal.

In Australia, Prime Minister Howard said Australia had a much smaller percentage of the sort of risky sub-prime mortgage loans than in the United States and urged people not to overreact.

The European Commission meanwhile said it will investigate how credit ratings agencies operate, amid mounting criticism that they did not act fast enough to warn investors about the danger of putting money into securities linked to sub-prime home loans in the US. - AFP/de