Guy Hands' bid for EMI, the music giant, is on a knife edge following turmoil in the world's financial markets. Hands is boss of private equity firm Terra Firma, which is offering 265p a share.

Stock markets around the globe plunged last week and there could be more steep falls tomorrow in the Far East and London, after America's Dow Jones fell more than 200 points on Friday.

Investors are unsettled by rising interest rates, mortgage defaults in the US and a credit crunch that is affecting private equity firms such as Terra Firma, which is seeking to raise funds in the debt market to bankroll a £2.4bn takeover of EMI, chaired by Eric Nicoli.

Hands may be forced to pull the bid because it is believed that Citigroup, which is arranging the debt finance, will have to pay an extra £150m because of the increased risks now associated with highly leveraged bids. Some observers say that the deal could still get away, 'although it is a very close call'.

City bankers said yesterday that Citigroup was refusing to reassure Hands that it would continue to support the bid if he failed to garner at least 90 per cent acceptances from EMI shareholders by the time the bid timetable lapses today.

Under normal circumstances, Citigroup would agree to waive the 90 per cent rule to give Hands the chance of asking the takeover panel to agree to an extension of the deadline, to allow the predator more time to secure agreement from shareholders.

One analyst says: 'It is touch and go when it comes to EMI and Terra Firma. It very much depends on the level of acceptances - I reckon that Hands must emerge with well over 70 per cent for Citigroup to play ball.'

Sources in Canary Wharf say that Citigroup's US boss, Chuck Prince, has personally intervened by contacting senior staff at the bank in London to warn them of his concerns. But it is not known whether Prince has ordered that the deal be cancelled. One banker says: 'I would be gobsmacked if Citigroup throws a spanner in the works as Terra Firma is one of its oldest clients. In the long term, it would lose business, as Hands would take his custom elsewhere and other clients could feel similarly outraged.'

Confidence in markets from Tokyo to New York has been shattered by fears that a credit squeeze will end an era of cheap funding for corporate takeovers.