What is a bear market?

The usual definition is that the market must fall by a fifth from its 12-month peak. As far as the FTSE 100 is concerned, its recent high point was on October 14 last year when it reached 6730.7. A 20% fall implies a level of 5386; the leading index closed far below that today, at 5261.60. We are now officially in a bear market.

What has caused this slump?

The long period of share prices moving ever higher came to an abrupt halt last October, when the full implications of the US sub-prime crisis and the subsequent credit crunch began to sink in. The news since then has been getting ever worse, sending markets tumbling around the world as the US contagion spread. Banks have been forced to write off billions of pounds of bad debts, with some forced to come cap in hand to their shareholders for cash to shore up their balance sheets.

The soaring oil price has led to inflationary pressures, making it more difficult for central banks to cut interest rates and prevent their economies sliding into recession. So with the spectre of rising inflation and slowing growth, investors have decided that companies will struggle to meet profit forecasts and have sold their shares. The declines have been exaggerated by short sellers borrowing shares to take out massive bets that prices will continue to fall.

Without the influence of mining and energy stocks - which have been supported by rising commodity prices - the bear market would probably have come sooner. Indeed, the FTSE 250 index, which is more broadly representative of the UK economy, reached that milestone back in January.

This week's falls followed declines in the US and Asia, after two US mortgage lenders were said to need to raise another $75bn (£37.99bn) between them. On top of that the British Chambers of Commerce warned that Britain is in danger of falling into recession.

How long will this go on?

The last bear market lasted from 2000 - the bursting of the dotcom bubble - to the invasion of Iraq in March 2003. Analysts believe there is value in many company shares at the current low levels. But investors will be reluctant to move back into the market as long as there is a belief that banks will have to make even more provisions for bad debts, something which seems inevitable given the continuing problems in the housing market.

Some strategists think the FTSE 100 could fall as low as 5000 before staging anything like a real recovery.