Britain's top shares fell on Tuesday, rattled by crude prices which soared to new record highs for a sixth day running, threatening a harder hit to the UK economy amid new signs of slowing growth.
After a round of lower earnings from US financial institutions, banks were the weakest sector in the FTSE 100, which FTSE International said ended the day down 37.6 points, or 0.8 percent, at 4,647.9.
This was more than 80 points below the peak of a start-of-quarter rally that took the FTSE to its highest level in 28 months last week.
Reflecting immediate margin fears at major fuel consumers, British Airways shares fell as US crude oil futures touched a new record above $54 per barrel on threats to winter energy supplies. Supply pressure came from several major oil-producing regions at once, including Norway, where a rig workers' strike is expected to widen, and the Gulf of Mexico, where oil fields are still running at low output after Hurricane Ivan.
"I'm an optimist. I think the UK equity market is not expensive and accordingly, at some stage, it will have the ability to go higher," said Tim Rees, director of investment strategy at Insight Investment. "The timing is not obvious. The market has been worrying about a lot of things for the last two years, some of them belatedly."
"Oil is a very easy one to point to. I think it's more about general economic issues - is it the start of something recessionary or is it something that is usual after very strong growth?"
In September, annual inflation unexpectedly fell to its lowest in six months, sending a chill through UK markets on Tuesday. UK government bond prices rallied as many investors abandoned expectations of a November increase in UK base rates, and a growing number bet the Bank of England might actually have to cut rates to keep inflation on target.
Compounding economic concerns, a mid-cap house-builder provided fresh evidence of a slowdown in house prices. George Wimpey posted a decline of 2.5 percent after the house-builder said a slowing housing market would cut into its sales volumes, though it reassured investors that margins would hold firm.
Abbey National, the UK's second largest mortgage lender, fell 1.9 percent after the Wimpey statement, while the largest lender, HBOS, fell 2.1 percent.
Banks cast a pall on trade on two continents. State Street Corp hit equities in New York after announcing unexpectedly low quarterly profits and a round of lay-offs, while Merrill Lynch beat forecasts but posted a third quarter profit decline that emphasised weak bond and equity markets.
Anglo-American fund manager Amvescap sank 3.8 percent.
Expectations of job cuts at Deutsche Bank and other financial institutions hit Reuters Group, which closed down 3.5 percent. Core revenues at the news and information group are generated largely by sales of screens to banks, brokerages and fund managers.
On the upside, fresh bid speculation helped mid-cap asset management group Singer & Friedlander 4.2 percent higher after Iceland's Kaupthing, with 22 percent of its stock, made a share issue to stock the warchest for potential acquisitions in Scandinavia and Britain.
Imperial Tobacco rose 1.9 percent in a late rally. British tobacco companies have been supported by talk Japan Tobacco is looking to make an acquisition in the UK, though most recently the focus has been on Gallaher Group.
Consumer-oriented shares fared well on the whole after data showed British retail sales rose at their fastest annual pace in three months in September, backing up hopes that sales across the high street are recovering after a damp summer. Figures from the British Retail Consortium indicated clothing had fared well.
Retailer Marks & Spencer added 1.3 percent after it said like-for-like sales in the 12 weeks to October 2 fell 5.5 percent from a year earlier but that clothing and home sales had been steady in the two-week period since its last trading update. Dealers said it marked a gradual improvement for the struggling retailer.
Diageo, up 0.7 percent, was among the day's most heavily traded stocks. Lehman Brothers analysts in a morning research note cited AC Nielsen market research showing Diageo had outperformed a growing market for spirits in the United States in September and would probably continue to fare well. Dealers said Tuesday's gain also reflected market approval for its recent sale of shares in General Mills.