The US Federal Reserve's Operation Twist failed to bring calm to financial markets, which tumbled on Thursday as investors took fright at the US central bank's gloomy warning about the economic outlook.

The FTSE 100 index in London plunged more than 210 points to 5078, a 4% drop, with not a single riser in sight. In Asia, markets also suffered heavy losses, with the Nikkei closing down 2.1%, Hong Kong's Hang Seng tumbling 4.9% and the Jakarta stock market losing nearly 9%. On Wall Street, futures indicate the Dow Jones will open 160 points lower.

The sell-off came after the Fed unveiled a new $400bn bond-buying plan on Wednesday to ward off a double-dip recession. It emerged on the same day that the Bank of England was also getting ready to pump more money into the British economy.

The European Central Bank came under pressure to take action itself after a worsening in the services and manufacturing sectors sparked warnings that the economic recovery was definitely over. This was exacerbated by news that industrial orders in the eurozone slid for the second month in a row in July.

The Fed's open markets committee said the economic outlook had deteriorated sharply, noting there were "significant downside risks" to its economic forecasts and indicating that a full recovery was years away. "Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated."

This drove the Dow Jones down 2.5% on Wednesday while the Standard & Poor's 500 index lost 3%. The dollar hit a seven-month high on Thursday as investors scrambled for safety.

Ben Potter of IG Markets in Melbourne, Australia, said he expected "a session of heavy selling as the world reacts to the Fed's downbeat outlook for the US economy".

Commodities tumbled on news that Chinese factory output had shrunk for a third month in September as flagging overseas demand put the brakes on new orders. Brent crude oil lost more than $2 to $107.50 a barrel while US crude dropped $3 to $82.92 a barrel. Copper lost 3.3% on the London Metal Exchange, falling to a 10-month low of $8,028.75 a tonne.

"It is another blow after the Fed's language about downside risks on the economy really hurt sentiment," David Thurtell of Citigroup in Singapore told Reuters.

Double twist

"Operation Twist", named after a similar measure launched in the 1960s under President Kennedy, will see the Fed buying $400bn (£258bn) of long-term Treasury bonds by June 2012 and selling shorter-term debts. The measure is aimed at driving down long-terminterest rates across the economy, in an attempt to reduce the cost of borrowing for indebted homeowners and struggling firms.

In another effort to help the ailing US housing market, the Fed chairman, Ben Bernanke, said as the mortgage-backed securities it owns matured, it would reinvest the proceeds in buying new mortgage bonds. Economists called the measures a "double twist".

Gary Jenkins, head of fixed income at Evolution Securities, said: "Twist and doubt? You have to hand it to the Fed. They have gone all retro on us and persuaded the market to call their latest attempt at intervention 'Operation Twist' rather than 'QE 3'. The latter might imply that the first two attempts didn't quite work out as hoped so far better to change the name …"

He added: "The basic idea is of course to stimulate economic growth by persuading investors into risk assets … the one thing that is clear is that Mr Bernanke is prepared to use all the weapons in his armoury in order to try and ensure that the US does not enter a long period of low growth, so Operation Twist may not be the last intervention unless it works. And of course the UK is about to follow suit."

Paul Ashworth, chief US economist at Capital Economics, was not convinced Operation Twist would do much good. "The big question is whether this latest action will accomplish anything? We doubt it. Judging by the modest rally in 10-year Treasury yields since the announcement most of this was already priced in. More generally, the cost of borrowing simply isn't the problem. Businesses don't have the confidence to invest and half of all mortgage borrowers don't have the home equity needed to refinance at lower rates."