Wall Street giant Goldman Sachs has been accused of defrauding investors in a civil lawsuit filed by America's Securities and Exchange Commission (SEC).

The US government's financial watchdog said Goldman Sachs misled investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.

The SEC announced it had lodged civil fraud charges against the company and one of its vice presidents on Friday, news that sent stock markets worldwide reeling. London's FTSE 100 Index plunged 1.4 per cent in reaction.

The SEC alleges Goldman, which employs 5,500 people in the UK, failed to disclose that one of its clients helped create - and then bet against - sub-prime mortgage securities that Goldman sold to investors.

Investors in the mortgage securities are alleged to have lost more than a £650 million.