Is Soros taking his biggest gamble ever?

The gathering storm over London's financial markets hardly needed a pessimistic intervention from George Soros. The billionaire speculator weighed into the gloom this week with a prophecy that Britain and the United States were heading for recession. It was, he said, "the most serious financial crisis of our lifetime".

As his words reverberated around the news wires on Tuesday, the markets plunged. Wall Street watched helplessly as 200 points were wiped off the Dow after federal reserve chairman Ben Bernanke warned of trouble ahead in the US economy. Worries over America's two biggest mortgage lenders and a run on a failing bank that mirrored Britain's Northern Rock crisis contributed to a sense that things were spinning out of control. In London, the FTSE 100 index fell 160 points amid scenes of near-panic. There was a minor recovery but banking shares hit their lowest level for a decade.

As all this unfolded, Soros's bleak assessment came like a thunderclap from the darkening clouds. Soros is the man credited, if that's the right word, with breaking the Bank of England. His judgments over more than 30 years of investment performance provide a template for making indecent amounts of money and he is admired and feared, probably in equal measure. When he says we are in trouble, people listen. When he acts on his own advice, they pay very, very careful attention. This is one of those times.

Talk in the City suggests Soros has taken a significant position on the FTSE index. His nephew Peter Soros is believed to be overseeing the London operation, although when the Evening Standard contacted him yesterday by telephone he declined to speak. When asked if he was, in fact, heavily shorting the UK stock market, he replied "no comment" on three occasions - and then hung up.

It has been known for some time that Soros has gone short on European stocks but now the word is that, through his investment fund, he is staking a big down bet on London quoted shares.

This is how speculators - and Soros is the daddy of them all - make money in falling markets. By buying financial instruments called futures it is possible to take a punt on the movement of the Footsie. Soros's bet, it is believed, is that it will go down.

So what, it might be thought? A lot of people think the Footsie has further to fall. Nicola Horlick, the influential fund manager, has been telling anyone who'll listen to get out of equities. There was a rally yesterday but this morning the index fell 46.9 points to 5239. Will it continue downwards, breaching even the psychologically important 5,000 level? News today that the Treasury is looking at relaxing its own rules on government borrowing will not help. Many will see any attempt by government to borrow its way out of the current crisis as a desperation measure.

Most of the indicators suggest Soros may be safe with his bet that the Footsie will dive. But the clever money might suggest this is hardly the point. The real question is does Soros have the ability to turn his punt into a self-fulfilling prophecy? In these febrile times, with the market like a man sleepwalking on a precipice, perception is everything. Can the power of Soros's reputation and history help tip the FTSE index over the edge?

Any move by Soros commands special attention. His cachet may have slipped a little in the past few years but he still has a reputation for being a man who can move markets, especially those as delicately poised as London is just now. Who can forget Black Wednesday?

On 16 September, 1992, Britain was forced to quit the European Exchange Mechanism after a humiliation that saw the Treasury spend £27 billion in an attempt to shore up the pound. It had been sold short relentlessly by speculators among whom Soros was believed to be the most active. He is said to have made £1 billion from the affair, although he has never confirmed - or denied - this figure. As Soros bets against the Footsie now the inevitable question is - could he do it again?

There may be a view that the stock market has the resilience to withstand even an assault by Soros. But as awareness grows of his shorting strategy there is a bound to be a reaction. The impact of this reaction may depend on how aggressive he and, no doubt, his associates, decide to be.

After hammering the pound, Soros repeated the exercise with the Thai baht. His Quantum fund has been among the most successful investment vehicles ever seen and despite giving away a sizeable portion of his wealth - $6 billion according to one estimate - Soros still features high on the list of the world's richest individuals with a fortune of at least $10 billion. Last year he was the second biggest hitter on Wall Street, according to Forbes magazine, with earnings of $2.4 billion. Soros will be 78 next month. Apart from his philanthropy, he has also been busy helping shape the modern world. His backing for the Solidarity movement in Poland, Charter 77 in Czechoslovakia and the Rose Revolution in Georgia contributed to profound change in those countries. His influence on Russia before and after communism has been widely acknowledged. He may have failed in his ambition to topple George W Bushbut his successes have been many and some will wonder why he might be bothered, at this stage in his life, to risk a potentially bloody battle on the London stock market.

Perhaps it is a matter of unfinished business. Soros is still hungry for recognition but not as a man who can make vast amounts of money, rather as a prophet of the age, although the word he might use is philosopher. Indeed, philosophy is Soros's first and most enduring love. Anyone trying to second guess himwould do well to look at his roots.

He was born in Budapest in 1930, the son of Teodor Schwartz, a Jewish intellectual and idealist who had been captured by the Russians on the eastern front in the First World War. Teodor made it back to Hungary and pursued a career as a lawyer and one of the world's leading exponents of Esperanto. As fascism took hold in Germany and elsewhere he changed the family name from Schwartz to Soros, the Esperanto for "will soar".

After the war Georgemade his way to London and was accepted as a student at the London School of Economics where he encountered the man who was to become one of the most profound influences in his life, Professor Karl Popper.

Sir Karl, as he became, was an Austrian to whom Soros could relate on almost every level. Theirs was a shared background of intellectual rigour, often set in the context of a conversation, or chess game, in a central european coffee house. Popper's Open Society thesis was adopted wholeheartedly by Soros who expounds it to this day. He is currently chairman of the Open Society Institute. For Soros, an open society is a global entity where the rivalries and conflicts of nation states become irrelevant.

One can detect in this the ideals of Esperanto, the international language that would allow communication between the world's peoples, whatever their mother tongue. Soros values highly the ability of individuals to communicate. When he stepped in with aid for post-communism Hungary one of his first gifts was to provide libraries and schools throughout the country with photocopiers so printed material could be widely circulated.

But it is not as a Popper acolyte that Soros may wish to be remembered. He has formulated his own philosophy and an important element of it is relevant to the question of whether he might be working on a strategy to humble London's financial markets. The key word is "reflexivity", a term he coined as a label for his own thinking on how markets work.

The idea of reflexivity is that perceptions - and misconceptions - interact with an underlying reality while having the ability to change that reality. According to Soros, participants in events change the facts through the way they think about them while the events themselves can change the thinking. The relevance of that to current happenings in the City needs no explanation.

When he delivered a lecture on reflexivity in Washington in 1994, he expressed disappointment that it had not been more widely accepted. Some feel Soros is a touch miffed that his many books have failed to have the impact he might have liked. His latest, The New Paradigm for Financial Markets, opens with the statement that "this is the worst crisis since the Great Depression". It has been well received and, unlike some of his earlier works, is a bestseller.

It is tempting to imagine that the state of the financial markets offers Soros an opportunity not just to make money but also to demonstrate once and for all that his theory of reflexivity really does work.

He may feel he has nothing left to prove.

He lives comfortably but not lavishly by some billionaire standards, commuting between a gleaming white mansion in Westchester County in upstate New York and a house in Onslow Gardens on the border of Kensington and Chelsea. Apart from fund management, he oversees his philanthropic work, writes and gives occasional interviews. In an interview with the Wall Street Journal last month, he was tackled about the fact that the dire predictions in his new book repeated similar warnings in two earlier works but neither of them came true. Was he crying wolf again?

Soros took the point in good humour. "After the boy cried wolf three times," he said, "the wolf really came."