Trade over the Christmas and sales season fell 2.7 per cent, far above the 1.2 per cent expected by analysts and, excluding car purchases, dived 3.1 per cent, the worst fall since records began in 1992.
In London, the FTSE 100 index of leading UK companies fell 256.93 points to 4,142.22 and, in New York, the Dow Jones industrial average fell 291.19 points to 8,157.37..
Tightening credit conditions and rising unemployment contributed to a slowdown in spending by US consumers last month.
America has been stunned by the loss of 2.6 million jobs over the past 12 months, sending unemployment in December to 7.2 per cent, the highest level in almost 16 years.
Almost all large retailers have trimmed their full-year and fourth-quarter forecasts after a dire festive sales period despite record-breaking discounting.
Eleven of the 13 major product categories monitored by the Government fell in December, with most down by at least 1 per cent.
Only health and beauty retailers and the miscellaneous category reported a rise in sales last month.
Much of overall drop in figures last month was due to plummeting petrol prices, which pushed down fuel sales by 15.9 per cent.
The International Council of Shopping Centers said last week that the final two months of 2008 had been the worst shopping season in almost 40 years, with same-store sales down 2.2 per cent.
Ian Shepherdson, chief US economist for High Frequency Economics, said that today’s figures confirmed that the festive sales period had been truly disastrous.
"Surely, Q1 can’t be as bad," he said.