London is struggling to hold its ground in the global credit rout, yet powerful forces still support its emergence as the world's undisputed financial hub.

The UK capital has long dominated trade in foreign exchange, international bonds, foreign shares, and over-the-counter derivatives, while New York boasts massive domestic markets and unrivalled hedge fund and private equity assets.

Right now, London's value as a physical place to do business is tumbling because of its very reliance on financial services.

No other major global office market has seen as big or as fast a correction in the last year - from Madrid to Dubai, Mumbai to Hong Kong, and New York to Orange County - as people hired to lend money get fired.

But London's financial hegemony has grown in recent years as economic power has shifted east with the rise of Asia's mega-markets and the surge in petrodollars. That process is far from spent, despite the damage inflicted by the credit crunch.

Central London office prices have fallen by a fifth in the last year as the city's financial industry sheds a chunk of its 350,000-strong workforce.

In the City banking district, office rents are about 10 percent down on last year's peak. Sooner or later that should hit the hedge fund haunt of London's West End - the world's most expensive office location.

There is also worse to come as the UK economy flirts with recession and City landlords battle to attract tenants through a rising tide of office developments.

Luckily for London, the 2,000 year-old city has more going for it than just the towering City and Canary Wharf financial districts and cranes that dominate its skyline.

The strong euro has delivered a stream of tourists from mainland Europe and helped to keep shop tills ringing even as retail sales weaken elsewhere in the UK.

IN EXCESS

But with financial services making up one seventh of its economy, London is clearly vulnerable - and some commentators see financial services going through a period of structural, not just cyclical decline.

Many of the complex and risky financial instruments London excelled at - from structured products to over-the-counter derivatives - are threatened with greater regulation.

That could crimp a recovery in these markets, hit arbitrage trading, and dull the prospects of auxiliary services, including the lawyers employed to pore over complex documentation. Jones Lang LaSalle estimates that law firms occupy 15 percent of the office space in London.

Global investment banks with a strong presence in London may also have to downsize a lot more, having super-sized on a diet of high leverage and unleashed the mother of all credit crises.

In a note this month, Deutsche Bank strategists suggested $1.2 trillion (602 billion pounds) of profits might have to be erased for just the U.S. financial sector to be fully cured of the excesses of the previous decade. That is compared with the $350-400 billion in losses that has so far been reported by banks globally.

CONDUIT FOR CAPITAL

However, financial innovation is not going away and neither will the growing pot of savings as populations age and the global economy is transformed through the relentless rise of emerging economies, especially in Asia.

A recent report by Goldman Sachs estimated that two billion new people will join "the world middle class" by 2030 - a powerful cohort that will drive demand for financial services.

That will mean financial jobs growth shifting eastwards to the benefit of Singapore, Hong Kong, and Dubai. But it will also consolidate London's role as a conduit for capital flowing between the Americas, Middle East, and Asia.

The city's skilled workers in financial firms and support services, its pragmatic approach to regulation and its open economy will sustain its allure for companies wishing to raise capital and boost their international profiles.

London has also welcomed newer markets - such as Islamic finance, carbon trading, and property derivatives.

The very speed of its real estate correction reflects the city's market-driven nature, and could sow the seeds of recovery.

"This correction in London will be one of its strengths as a financial centre as office rents will become more competitive," said Peter Hobbs, head of global research at RREEF Alternative Investments. "And the surge of new development means that good quality space will be available at relatively low rents."

While travellers have voted Heathrow the world's least favourite airport, London's creaking infrastructure is being revamped ahead of the 2012 Olympics and it is due to gain a new east-west rail link by 2017.

As long as English remains the main foreign language taught in Asia, 15 hours separate Los Angeles and Shanghai, and New York's private equity and hedge fund industry views an office in London as indispensable, the future is still London's to lose.