THE years 1929, 1987, 1997. The times when the markets turned nasty roll easily off the tongue, and now there is a new one to add to the list.

Markets from Tokyo to New York might since have recovered most of what they lost in the new Black Monday, but you don't recover your nerve from a pasting like that overnight. The fact that no experts can agree on what will happen next tells you all you need to know. Hold on to your hats, because the worst could yet be to come.

It therefore seems appropriate to start off with a little good news that made few headlines late last week. The London Interbank Offered Rate (Libor), which is the wholesale price banks charge for lending money to each other, slipped below its official Bank of England-set 5.5% rate for the first time since the credit crisis erupted last summer. It hit 5.44%, and although it then climbed back slightly north of the 5.5% mark, observers say it could mark the beginning of the end of the crunch that has thrown fear and loathing into the financial system.

The rise in Libor to almost 7% last autumn was what caused the credit crunch in the first place. It reflects the level of liquidity in the main money markets and is a proxy for the degree of confidence the world's biggest lenders have in each other's position. In support of the view that the money markets are easing, others point to the slight decline in the United States's Vix index of volatility, the so-called "gauge of fear" that nearly went off the clock before the markets recovered.

"I suspect that the worst of the credit crunch is over," says economist Ed Menashy of brokers Charles Stanley.

If that is the case, there may yet be hope for the world markets. According to most analysts, it was the credit crunch that lay behind last week's devastation because investors feared the impact on share prices of more bad news from banks, insurers and others exposed to the subprime disaster. "A head of steam had been building up in the markets," says one analyst who asked not to be named. "Some feared the global financial system was ready to collapse."

But with Libor approaching normality for the first time in more than six months, there are some who even believe there could be fresh growth around the corner. "In my view prices are absurdly cheap," says Menashy. "The average price-earnings ratio is 10. That's equivalent to a 10% return for every £100 invested. Compare that with 4.5% on 10-year gilts, it's a no-brainer."

Investec strategist Max King agrees the markets are oversold. "Markets have already fallen to levels that discount significant declines in earnings for this year and negligible recovery in 2009," he says. "An enormous amount of bad news is already priced into equities."

The gains made by the FTSE 100 in the week's closing stages suggested that these arguments might have been swallowed by the big investors.

But let's not get carried away with ourselves. The other side of the coin is that the tidings for the economy at large are far from promising. If the doomsayers are correct, there will be many more days like last Monday still to come.

According to Bank of England governor Mervyn King, the supply of credit to businesses will continue to tighten. Basing his opinion on the bank's latest credit conditions survey - a key barometer of lenders' expectations, the governor believes: "We should expect a prolonged period of discomfort for individual banks and the financial system as a whole."

And ominously, the governor considers this is a good thing after the excesses of the past few years in an era of cheap money. "The repricing of risk that is still going on is not a process that we should try to reverse," he said in a recent speech. And as economists point out, a constrained financial system inevitably means a tight economy.

One thing on which analysts do agree is that the credit crunch has changed the outlook for practically everything in the UK economy. Among sectors deemed to be at risk in the short-term is commercial property, because of a decline in retail demand and capital values "across all sectors", notes the Royal Institute of Chartered Surveyors. Adding weight to the official view is Standard & Poor's analyst Scott Bugie, who predicts that a tight market in mortgage finance could contaminate the sector.

Another at-risk sector could be commodities, which is due for a "rebalancing", especially in the high-priced metals and energy sectors, according to Deutsche Bank's Jude Brhanavan. "We expect further declines in the Standard & Poor's 500 in this environment," the analyst said in a note.

The outlook for private equity and other big investment funds is mixed, but far less rosy than in early 2007 as the major lenders tighten up their lines of credit as well as the fine print in loan covenants. Although some fund managers say this is a time to buy, especially those distressed assets selling below true value, the prospect of rising interest rates threatens the viability of projects developed before the crunch hit.

New Star, until last week a favourite among institutional fund managers that has invested heavily in commercial property, cut its dividend as investors took fright at the turmoil in the money markets and withdrew a total £1.8 billion from its domestic and overseas funds.

That still leaves it with £23.1bn under management but the tremor shook the sector. According to the fund managers' official association, for the first time in 15 years investors withdrew more than they invested in the past six months.

And the typically highly leveraged pub sector, which is also associated with the fortunes of commercial property, faces a downturn as indebted consumers turn to low-margin beer instead of high-margin shots. For example, the share price of JD Wetherspoon, which owns 680 high street pubs, fell sharply during the week after reporting a decline in sales.

But it is the financial sector, the one governor King consistently singles out for blame for loose lending practices, that could be under the heaviest pressure. For instance, the share price of Royal Bank of Scotland got another hammering last week and continues to hover around the 400p mark, the lowest it has been in seven years. Investors are clearly waiting to see how well RBS swallows its £53bn acquisition of ABN Amro's wholesale banking arm before they buy back in.

The Financial Services Authority, the sector watchdog, is considered certain to demand higher levels of capital among UK institutions. According to Standard & Poor's analysts, the UK banks are "thinly capitalised" by world standards and are overdue for a health check. The Bank of England has also expressed fears that the banks will suffer from a rise in corporate debt this year.

In short, there is plenty of pain to come even if the markets do regain their nerve in the days ahead. Libor's rise on the back of the subprime crisis might have got us into this mess, but it might take more than its recovery to get us out of it.