Britain's biggest shares closed lower on Tuesday, dragged down by a steep drop by mobile phone giant Vodafone as analysts pencilled in earnings downgrades for the company because of its struggling Japanese unit.
Vodafone, the third biggest FTSE 100 company by market weight, closed down 10.8 percent - the biggest percentage fall for the stock since September 1998, when concerns about a global recession sent stocks in the UK and on Wall Street tumbling.
"The lack of any meaningful dividend increase as well as uninspiring guidance for next year leaves us disappointed," analysts at Dresdner Kleinwort Wasserstein said, adding they were likely to cut 2006-07 earnings estimates for Vodafone by about 6 percent.
Virgin Mobile fell 6 percent as sentiment was hit across the whole sector. Other telecoms showing a loss included Cable & Wireless, down 3 percent, and BT Group, off 1.7 percent
Diageo fell 3 percent after the maker of brands such as Smirnoff vodka and Guinness beer warned its that first-half sales and profit growth were likely to fall short of expectations because of disruptions caused by hurricanes in the United States.
By the close, the FTSE 100 share index was down 30.4 points at 5,439.6 - taking away from a 47-point gain over the previous two sessions.
Vodafone put 39 points of pressure on the index, but analysts said they remained optimistic about the market despite Vodafone's wobble.
"The corporate sector on the whole is doing reasonably well in terms of profitability and earnings and cash flow generation," said Chris Iggo, global strategist at AXA Investment Managers.
"Obviously Vodafone raises some questions about that assumption but to date the news has been rather good and it's shown up in some of the corporate activity we've seen in terms of buybacks and M&A activity."
Banks were among the stocks trading higher as investors held out hope that recent take-over bids for other UK stocks might spread to the sector.
"There's a possibility that one or two of these UK banks because they are profitable and cash cows will become targets," said Peter Kysel, head of European equities at MFC Global Investment Management.
Dealers said Barclays, up 0.8 percent, was the latest rumoured target with Bank of America suggested as a possible bidder, although they added that the speculation had been heard before and many were sceptical of an imminent deal.
Analysts have also been upbeat on UK banks recently, saying they look cheap now that several months of concerns about the domestic economy have held the sector back compared with the rest of the market.
Smith & Nephew gained 1.9 percent as analysts at Deutsche Bank said the medical devices maker looked 15 to 20 percent undervalued.
In the mid-cap sector, support services company Babcock jumped nearly 15 percent after it reported a surge in interim profits, while Northern Foods gained 7.6 percent as it hailed the success of a turnaround strategy.