Eighteen months ago, the City was riding high. Companies flocked from across the world to take advantage of London's principles-based regulation and wide investor base. The mood on Wall Street was more embattled. The subprime mortgage market was showing signs of strain and three separate commissions were bemoaning a loss of US competitiveness in financial services.

What a change the credit crunch has wrought.

Both financial districts are suffering through tens of thousands of job losses and are wary their cash-strapped governments will impose new taxes. Initial public offerings have fallen off a cliff and each country has experienced a high-profile financial failure - the UK's Northern Rock and Bear Stearns in the US.

But London seems to have endured more, perhaps because it had more to lose.

"The brand of London has taken a hammering because of Northern Rock," says Tim Linacre, chief executive of Panmure Gordon, a London stockbroker that also has a large US presence. "I don't think it is terminal, but London needs to be absolutely on its toes."

Meanwhile, New Yorkers are trying not to say "I told you so" now that financial woes have spread worldwide. They also are touting the benefits of tight regulation, saying that, with volatile markets, many investors value watchful regulators, tight listing standards and the right to sue.

"What Northern Rock demonstrates is that a business-friendly regulatory system may have its disadvantages as well," says Kathryn Wylde, president of the Partnership for New York City, a business group.

New York, which has an inherent advantage because of the size of its domestic market, has always dominated equity trading and this year it extended its lead.

In the first six months of this year, nearly $25,000bn (£13,596bn) worth of shares changed hands on the New York Stock Exchange and Nasdaq, up 18 per cent on the same period last year. Trading on the London Stock Exchange dropped 29 per cent to £4,000bn, according to the World Federation of Exchanges.

New York also remains the undisputed leader for alternative investments. Roughly one of every six private equity professionals, or more than 13,200 people, is based in New York compared with 7,100 in London, according to Prequin, an intelligence service.

The number of hedge funds worth more than $1bn located in New York rose from 123 last year to 144 this year, and their collective assets jumped from $650bn to $973bn, according to Hedge Fund Intelligence. London remains a distant second. It added just two new large funds year on year and now has 75 $1bn funds managing $348bn.

But London continues to be the exchange of choice when companies look to list outside their home country. According to the LSE, 22 foreign companies have listed on its exchanges so far this year, compared with nine for NYSE and Nasdaq combined. And Harvard professor Hal Scott found that only 1.6 per cent of foreign IPOs worldwide went to the US in the first quarter, down from an average of 29 per cent in the years 1996 to 2006.

Some of this decline reflects the fact that the US economy began struggling before Europe, but Mr Scott argues that US competitiveness continues to erode: "We're fighting for a declining share of a smaller pie."

London also leads New York in the Global Financial Centres Index, a twice-yearly ranking of more than 50 cities. But in the last survey, released in March, London slipped significantly, halving its lead over New York, which for the first time pulled ahead in banking.

Analysts attributed the slide to Northern Rock and the imposition of new taxes on non-domiciled residents.

A separate survey by the CBI employers' group found that 60 per cent of respondents felt London's competitiveness as a world city was under threat, up from 31 per cent in 2007.

Meanwhile, New York has benefited from a US Supreme Court decision making it harder for investors to win class-action lawsuits and from the Securities and Exchange Commission's decision to relax some of the most onerous provisions of the Sarbanes-Oxley corporate accountability law.

The US regulatory system has not escaped unscathed. The fallout from the subprime market and the collapse of Bear Stearns sparked concern, but they appear to have had less impact on confidence than Northern Rock. The crisis at Fannie Mae (NYSE: FNM - News) and Freddie Mac, which has potentially far more serious consequences, is still a story of Washington politics rather than New York dealing.

But some City analysts fear a regulatory backlash. The Financial Services Authority has insisted it will not allow the crisis to undermine principles-based regulation, but the European Union could also intervene.

"After the credit crunch there will be moves to have more financial regulation and we haven't got control of it. We handed it over to Brussels," says Ruth Lea, economic adviser to Arbuthnot Banking Group. "There we are just one voice in 27 and there's not a lot of sympathy for 'light-touch' regulation."

Yet London has two critical advantages: immigration policies and location.

"New York and London are both going to stay really important, but London has this very unique advantage: its time zone," says Jim O'Neill, head of global economic research for Goldman Sachs. London can trade and talk easily with Asia, the Middle East and the United States, while they cannot talk to each other."

The UK also makes it easy for foreigners to visit and work in London, while the US visa process is notoriously difficult.

"London's advantage has been its great hospitality to foreign entrepreneurs," says Bradley Fried, chief executive of Investec bank in the UK. "Foreign owners will bring in foreign business."

In the end, however, the battle may be irrelevant. "London and New York are the global centres and neither is going to pull away from each other unless something goes spectacularly wrong," says Richard Lambert, director-general at the CBI.

Rupert Hume-Kendall, Merrill Lynch's global chairman of equity capital markets, adds: "The competition is more driven by the corporate structure of these rival businesses [the exchanges] than by any investor desire. All investors are looking for is liquidity and sharp pricing and they will go wherever that is offered."