Britain's FTSE 100 index closed lower on Tuesday as inflation concerns grew in the United States, oil prices fell and shares in AstraZeneca slid after a rival said it was planning a cheap copy of its top-selling drug.
US producer price figures for September showed the biggest monthly increase in inflation in more than 15 years, boosted by soaring energy costs. The reading underpinned market expectations of further US interest rate rises, analysts said.
Rising petrol prices also pushed British inflation further above the Bank of England's target.
"The great worry is that higher energy prices are going to feed through into higher inflation and lower growth," Investec Securities strategist Roger Cursley said, noting market uncertainty over whether a more severe knock-on effect from high fuel costs awaits.
"If there is then we are looking at much tighter (US) monetary policy than consensus has been expecting - that has a knock through from the US market to our own."
However, Cursley suggested the equity market reaction to the figures may have been overdone.
"The headline inflation numbers do look fairly alarming but strip the petrol price out and there is not really a lot there," he added.
Having breached the 5,300-point mark in early trading, the FTSE 100 closed 22.6 points, or 0.4 percent, lower at 5,263.9 points - its lowest finish since August 30. The index has backtracked from its first close above 5,500 points in four years recorded on October 3, largely on concerns over global inflation and the future direction of interest rates in the United States.
"Well over half of the FTSE 100 have dollar-denominated earnings and worries about the US economy will hit there more than it hits anywhere else," said Richard Hunter at stockbrokers Hargreaves Lansdown.
Anglo-Swedish drug maker AstraZeneca fell 2 percent on news rival Ranbaxy Laboratories is planning a cheap copy of its best-selling ulcer treatment Nexium and had challenged the US patent on the $4 billion-a-year pill.
Britain's largest listed software firm, Sage, headed the list of FTSE fallers, ending 3.9 percent lower despite saying annual profits rose about 13 percent, in line with market expectations. The stock rose almost 4 percent on Monday after analysts anticipated an upbeat update.
"Year-on-year pretax profit growth slowed ... to around 10 percent in the second half. We imagine there will be some mild disappointment on these numbers," said Bridgewell analyst Kevin Ashton.
Crude oil prices fell as much as $1 a barrel, knocking heavyweight oil stocks, after Hurricane Wilma appeared to be heading away from oil rigs and refineries in the US Gulf. The devastating effect of Hurricane Katrina in the Gulf of Mexico sent oil prices to record highs of over $70 a barrel in late August.
Oil major BP closed 1.5 percent lower and Royal Dutch Shell fell 1 percent despite an investment upgrade from Goldman Sachs. The oil and gas sector contributed almost 13 points of the FTSE's fall.
Media stocks also fell, with ITV down 2.6 percent and BSkyB shedding 2.4 percent.
"We have seen a flight to quality with people talking about inflation - the media sector is exposed to a bad economy," one trader said.
Mid-cap semiconductor designer ARM slid almost 11 percent after it cut revenue estimates for the full year.
On the upside, Britain's largest insurer Aviva was the top FTSE gainer, up 3.1 percent, as investors cheered increased profit targets from its general insurance business. The market was also impressed by progress in Aviva's newly-acquired motor services group, RAC.
"When they first announced the deal it looked expensive but now with the cost savings and the revenue gains it looks like they got it for a good price," said Colin Morton, a fund manager with Rensburg.