The Russian government sent shockwaves through the international financial community last night when it took the unprecedented step of freezing shares in the country's largest oil company.

Raising fears of a nationwide challenge to big business and the re-nationalisation of private property, Kremlin hardliners, who on Saturday ordered the arrest of Russia's richest man, Mikhail Khodorkovsky, yesterday seized control of a large stake in his company, Yukos.

Mr Khodorkovsky was grabbed at gunpoint on a Siberian runway by the prosecutor general's office, on charges of tax evasion. The government said yesterday that prosecutors had seized 44% of the shares in Yukos, which Mr Khodorkovsky controls. Yukos shares plummeted 12% on the news. The Russian stock market dropped about 8% overall while the rouble and Russian bond prices fell too.

In a bid to sooth jittery markets, President Vladimir Putin called in Russian business leaders, but foreign and domestic investors dumped Russian shares and bonds all the same.

"It's horrible. It's in line with our worst case scenario for Yukos. It is a case of sell now, think later," an analyst at a Russian broking firm said.

The move against Mr Khodorkovsky and Yukos raises fears that Kremlin hardliners could be planning to revisit some of the 1990s privatisations which made huge fortunes for a handful of oligarchs who now control an estimated 60% of the Russian economy.

Analysts said the fall out from the affair would damage confidence in Mr Putin's economic reform programme, making foreign investors more cautious about Russia and risked leading to capital flight.

"This puts a question mark over corporate governance in the Russian market as a whole. We are hearing a number of big foreign investment funds are starting to take out money," Paul Luke, an emerging market specialist at London-based Convivo Asset management, said.

But another specialist, Arnab Das of Dresdner Kleinwort Wasserstein, said Mr Putin would be restrained from widening his attack beyond Mr Khodorkovsky by the economy's dependence on foreign investment.

Either way, a rumoured deal which would have seen Exxon Mobil take a big stake in Yukos is now believed to be dead and buried, while bankers in London said last night the seizure of the stake could also threaten a $1bn (￡588m) loan to the oil giant.

The oligarchs are unpopular with the Russian public. Standards of living have fallen for the vast majority of the population since the transition from a centrally planned economy, at a time when a tiny minority have won extraordinary wealth through dubious means.

Mr Khodorkovsky is charged with seven offences under Russian law, which allegedly damaged the state to the tune of $1bn. The prosecutor general's office said the seized Yukos shares, worth an estimated $12.6bn (￡7.4bn) and owned by two foreign companies, were being held "as security against material damage".

In Moscow the seizure was seen as a bold step by Kremlin hardliners apparently keen to "redistribute" the state assets acquired by the oligarchs.

Analysts and legal experts said it represented a brave new world in Russian business and the end of the Kremlin's tolerance of a powerful elite. "We are living in a new country now," said Lilia Shevtsova, a senior associate at the Carnegie Endowment. She said that the targets of this new ideology were "not only those with political aspirations, but those [companies] who want to be independent of power and bureaucracy. Mr Putin has made a choice, and rejected the role of those trying to strike a balance [between big business and power]. He has chosen a strong state without political pluralism and with a corrupted economy."

Mr Khodorkovsky's arrest was seen as marking the beginning of a takeover in the Kremlin by members of the FSB - Russia's security services - who are loyal to Mr Putin and bent on absolute power. The second victim of what Russian media is calling a "coup", was Mr Putin's chief of staff, Alexander Voloshin.

Yukos yesterday said the seized shares belonged to a wide-range of individuals, including Yukos executives and senior political figures, and not Mr Khodorkovsky. Legal experts said this made the seizure questionable legally.

"This is unprecedented," said Alexander Dobrovinsky, a leading Moscow lawyer. "I have never seen this action before. If the shares do not belong to the person, you can't seize them. These shares belonged to a different company and Khodorkovsky is not [registered as an owner] there."

Mr Dobrovinsky stated that the freezing of assets linked to criminal activity was permitted under Russian laws.

Were Mr Khodorkovsky to be found guilty, the state would officially take control of the shares, and could then keep them, sell them to one big buyer, or sell them in smaller groups on the open market. In the event of a conviction, he said, the Kremlin would probably hold on to them for a while and then sell to one big buyer.

Boris Nadezhdin, a distinguished lawyer and senior member of the opposition party the Union of Right Forces, said: "I simply do not understand why this is necessary and I cannot see any legal point to it. The only explanation I can offer is that it is another act of intimidation."

A company spokesman said the shares were owned by Yukos's foreign shareholders, Yukos Universal Limited and Hulley Enterprises, registered on the Isle of Man and Cyprus: "These companies, as is widely known, belong to a whole group of shareholders, most of whom have nothing to do with Mikhail Khodorkovsky."

The prosecutor's office said Hulley Enterprises, which holds 1.14bn shares, and Yukos Universal Ltd, which holds 49m, were subsidiaries of Gibraltar-registered Menatep Group Ltd, in which an estimated 59% of shares belong to Mr Khodorkovsky. The seized shares are held in accounts in the Trust Bank in Russia.

Shortly before the seizure, the Yukos spokesman Hugo Erikssen added that the arrest of the Yukos CEO marked the "inevitable clash of two visions in Russia".

He said the triumphant Kremlin hardliners, known as siloviki , "do not believe in communism, but they were raised in the communist system. They believe in the pre-eminence of the state."

Western business leaders had expressed their unease over Russia's economic future even before the seizure.

At a dinner at the British embassy in Moscow on Wednesday, some of Russia's leading businessmen joined western business leaders in celebration of moves in recent years towards promoting investment between the UK and Russia. But the talk on the tables was not of success, but fears about what the Yukos affair meant for Russia's future.

One of the more pessimistic attendees said: "Businessmen don't like having guns put in their faces. We're not criminals. If people think for a moment that they could be arrested because they have fallen out of favour with the authorities, then investors will look elsewhere."

Another added: "The next move is crucial. The administration can either calm our nerves or send us into a panic. It all depends on what happens next."

The Yukos shares were seized 22 hours later.

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