The Bank of England has signalled that the recent global credit crunch is set to continue with the short-term outlook for financial stability still uncertain.

Banking chiefs said stock markets remain "vulnerable to shocks", and that a period of tighter credit conditions is expected to affect the City.

And this may highlight "fragilities" among more vulnerable borrowers, such as those with sub-prime mortgages, while investors in equities and commercial property could also be hit, the Bank added.

The Financial Stability Report provides an assessment of the causes of the recent financial turmoil.

It states that the crisis in the sub-prime mortgage market in the US exposed weaknesses in the global financial system.

This in turn led to a drying up of the money markets, resulting in the problems faced by the banking industry which was graphically illustrated by the run on Northern Rock.

Billions of pounds were withdrawn from the bank after it was forced to go to the Bank of England as the lender of last resort.

The report is now urging the UK authorities to strengthen their crisis management arrangements to prevent a repeat of the panic.

It also suggests that the impact of the summer turmoil may not yet be fully apparent with the potential for problems to arise in the commercial real estate sector.

The warning comes as Chancellor Alistair Darling was grilled by a Treasury select committee hearing over his handling of the recent market jitters.

John Gieve, deputy governor for financial stability at the Bank of England, said: "A repricing of risk was due especially in credit markets. But the speed and ferocity with which that adjustment disrupted core markets and institutions internationally had not been anticipated by firms or authorities.

"There have been signs of recovery in recent weeks but some markets are still illiquid and the financial system remains vulnerable to further shocks.

"Some important lessons need to be learned by both financial institutions and authorities on liquidity risk management, valuation of complex instruments, disclosures of risk positions and on crisis management."

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