London Briefing:Crash or correction? That is the only topic of conversation in dealing rooms and bars around the Square Mile after the global share price rout of the past week.

Ostensibly triggered by a severe shake-out in Shanghai, the slide gathered pace as fears over the health of the American economy came to the fore and markets around the world tumbled like dominoes.

Comments from the former Federal Reserve chairman Alan Greenspan on the "possibility" of a recession in the US did little to help last week, although the market latched on instead to more soothing words from Ben Bernanke, the current Fed chief.

It is not known whether Mr Bernanke picked up the phone to Mr Greenspan to remind him of the unwritten rule that former Fed bosses keep their opinions to themselves once they have left office, but he must surely have been tempted.

Although nothing like the scale of the October 1987 market crash, the extreme volatility of the past week has served as a timely reminder that all is not necessarily well with the world economy.

One of the key worries in the US is the looming crisis in the housing market, fuelled by the recent surge in "sub-prime" lending - loans to customers with poor credit ratings.

Just as the British banks are paying the price for pushing easy credit to over-indebted customers, American lenders are now seeing a huge increase in numbers of sub-prime customers unable to meet their mortgage payments.

This was starkly illustrated on Monday when HSBC, Europe's largest bank, reported a record $10.6 billion bad debt charge, up 36 per cent on 2005 and of which $6.8 billion related to its US business. It was the growing crisis in the US that forced the bank to issue an unprecedented profit warning a month ago, the first in its 142-year history. Even so, its profits for 2006 reached a record for a British bank, rising by 5 per cent to $22.1 billion.

Heads have already rolled at HSBC for the American debacle but the group has admitted that the problems there could take as long as three years to sort out.

And it is not alone - as many as 30 of the smaller sub-prime lenders in the US are reckoned to have closed their doors and there have been disturbing rumours that some of the major hedge fund players may be heavily involved in the market.

So where does this leave the London market? The extent to which the US economy still influences the rest of the world is a subject of some debate among economists.

Traditionally, of course, America sneezes and the rest of the world catches a cold. However, some commentators believe there has been a significant "de-coupling" of the US and other markets in recent years, in which case the rest of the world might be able to withstand the impact of a recession across the Atlantic.

As for China, further bouts of extreme volatility are virtually guaranteed in the weeks and months ahead; when a market doubles in the space of a year, as the Shanghai composite index has, such exaggerated movements are a given.

For those who believe this is a correction rather than a crash, there are a number of encouraging signs amid the volatility.

For example, merger and acquisition activity remains buoyant - figures from Thomson Financial show a 16 per cent increase in the value of deals in the first two months of 2007, taking it to $610 billion.

This is the highest figure recorded since the previous peak of $816 billion seen during the dotcom boom of 2000 and includes the record-breaking $45 billion private equity buyout of the American energy group TXU Corporation.

In London, the deals continue apace. Just last week, the country's biggest estate agency chain, Countrywide, agreed a £1 billion private equity takeover from the American firm Apollo. The British private equity group 3i, which saw an earlier bid rejected, is said to be considering coming in with a rival deal.

Another £1 billion deal on Monday saw the famous Madame Tussauds company swap one private equity owner for another, as owner Dubai International Capital sold the business to Merlin Entertainments, a company controlled by the private equity firm Blackstone. The deal makes Merlin, which owns Legoland, the world's second-biggest operator of visitor attractions after Disney.

Meanwhile, the private equity bidders for Sainsbury's are expected to decide in the week or so whether they will go ahead with an £11 billion bid for Britain's third-largest supermarkets chain.

Such deals could, of course, be merely the froth at the top of the market and there are certainly some commentators who believe there is a real crash to come for London and the rest of the world. But, as the old Square Mile saying goes, when it comes to stock market forecasts, there are only two types of expert - those who don't know, and those who don't know they don't know.

• Fiona Walsh writes for the Guardian newspaper in London