The AI 'bubble' bursting could cause a global economic crunch, the Bank of England governor has warned.

Andrew Bailey delivered a stark message about the consequences of a 'future market correction' in a letter to powerful finance ministers.

He said the effects of a shock could be 'amplified' because firms were borrowing huge sums to invest in the tech.  

In his missive to the G20 meeting, taking place in North Carolina, Mr Bailey pointed to the 'volatility' caused by the Iran war fallout.   

Writing in his capacity as chairman of the Financial Stability Board, he said 'markets remain vulnerable to a potentially disorderly correction that could spread across borders, particularly given fragilities in sovereign debt markets'.

He added: 'The issue is not simply that investors are borrowing more, but that leverage is interacting with high valuations and market concentration, in particular the increasing cross-investment between artificial intelligence companies and hyper scalers, in a way that could amplify a future market correction.

'I remain concerned therefore that a large shock or combination of shocks could concurrently trigger multiple vulnerabilities.'

AI has been booming, with the US leading the charge to develop the tech. But nerves have been growing about the risks of a correction, with governments around the world facing rising costs to borrow. 

Mr Bailey also flagged concerns about 'frontier AI' – the most advanced form of AI – and the 'threat' it poses to cyber security. 

'The risks associated with frontier AI will not respect national borders,' he wrote.

'The global financial system is highly interconnected, and cyber disruption can spread across jurisdictions through common technology providers, shared infrastructure, and cross-border financial activity. 

'Differences in legal frameworks, cyber capability, resilience and recovery capacity across jurisdictions could therefore have consequences well beyond the jurisdiction in which an incident originates and may themselves become a source of vulnerability.' 

Mr Bailey's warning came as Chancellor John Healey announced a £100million fund aimed at backing British AI start-ups.

The fund is part of the Government's efforts to grow 'Sovereign AI' capacity, ensuring the UK is not dependent on services and infrastructure developed abroad.

Ministers want to see companies compete for the funding to help tackle challenges like cutting waiting lists in the NHS, and improving patient care, as well as bolstering cyber-security and defence.

Mr Healey said: 'Britain is home to some of the most innovative AI companies in the world, and this government is backing them to start, scale and succeed here in the UK.

'This first-of-its-kind competition will help make sure more of the benefits of AI are felt in every UK postcode.

'As G20 countries seek to make the most of AI opportunities, I'm determined Britain has a lead role in harnessing this technology to drive more jobs, better public services, and growth that's UK-wide.'