Australian shares sold off heavily on Wednesday, following savage stock-market slumps in Europe and the US.

The ASX 200 index of shares fell more than 2 per cent by mid-afternoon Wednesday, dipping below the index’s 5000 mark for the first time in two years, with resources sector stocks down 3.4 per cent and finance sector stocks (excluding property) falling 2.3 per cent.

The falls follow large sell-offs in Europe, with London’s FTSE100 index down 2.83 per cent, and Germany’s DAX index down 3.8 per cent at the close.

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Selling was less intense in New York, with the S&P 500 index was down 1.23 per cent at the close.

The European sell-off was attributed to a scandal surrounding auto manufacturer Volkswagen over faked emission-reduction claims about its cars – a crisis that may spread to other manufacturers.

Volkswagen is facing investigations in several major markets after admitting it has sold 11 million cars with diesel engines able to cheat emissions tests.

Share price falls in New York were driven by Asian Development Bank forecasts, which were revised lower for major Asian economies.