Major new US accounting probe

London dealers were braced for another session of volatile trading today following news of a major investigation into accounting practices at the world's biggest media and internet company, AOL Time Warner.

Although the Dow Jones Industrial Average of top US stocks made its second biggest one-day gain in living memory yesterday, news of the AOL Time Warner probe came after trading finished.

London was expected to follow Wall Street with a gain of about 170 points this morning but analysts said the deepening crisis of confidence in corporate accounting could hamper the recovery.

Markets are going through some of the most turbulent times in history and traders are still not sure whether shares had yet come through the worst.

Tim Hougaard, chief market strategist at City Index, said of the expected recovery: "The biggest worry is if it is yet another one-day wonder."

The City was left guessing as to the likely impact this afternoon of the AOL Time Warner situation. Officials at the US Securities and Exchange Commission-SEC) are investigating allegations that it inflated its profit figures through complex book-keeping practices.

It is the second time in a month that the SEC has launched an investigation into a company after a newspaper first raised questions about the firm's accounting.

AOL Time Warner has struggled to convince investors of its value since merging the internet business of America Online with the media interests of Time Warner.

It now faces the prospect of a federal investigation. The company ranges from Warner Bros music and films to IPC's glossy British magazines and the Time Magazine stable. Chief executive Richard Parson said the SEC was conducting a "fact finding" inquiry. He said he wasn't surprised because in the current environment any allegation, "even one without merit", would result in an official review.

AOL Time Warner was one of the few blue-chip American companies left out of Wall Street's 488-point rally yesterday. Even Citigroup and JP Morgan Chase recovered some ground despite a Congressional investigation into the banks over loans to the scandal-hit energy firm Enron.

A Congressional committee is demanding information directly from the banks' top executives, Citigroup's Sandy Weill and JP Morgan Chase's William Harrison.

Meanwhile, figures today from the British Bankers' Association are expected to add to evidence that the housing and credit card booms are fizzling out. The BBA said last week that mortgage lending rose by £4.1 billion in June, well down on May's £5.2 billion increase. Today it is expected to say that spending on credit cards dropped sharply following a surge in May.