British shares suffered big falls on Wednesday, led by miners and oil stocks, as markets tracked losses in other global equities on inflation concerns and before a Bank of England interest rate announcement on Thursday. Energy supply firm, Drax Group was down 3.3 percent, hit by a broker downgrade and after traders said bid talk had faded.
Miners were among the major decliners, which traders attributed to profit taking after a recent strong run. BHP Billiton, Rio Tinto and Anglo American all fell between 1.8 and 3.2 percent.
The International Monetary Fund said aluminium and copper prices were above sustainable levels and global metal prices were likely to retreat over time from their current high levels as new mine output boosted supplies.
The FTSE 100 index closed down 0.9 percent or 52.4 points at 5,929.3, with continental European markets also sharply lower. The FTSE 100 index, which hit a three-month high in the previous session, is still up 5.5 percent so far this year, however.
US shares were also lower and the pan-European FTSEurofirst 300 index shed 1 percent on Wednesday. In foreign exchange markets, the turbulence surrounding the leadership of British Prime Minister Tony Blair coupled with uncertainty over British interest rate prospects hit sterling, sending it to two-week lows against the dollar and the euro.
"The inflation fears from Wall Street have made us much more scared that the Bank of England will raise interest rates tomorrow, and trading will be thin until we get a result. This is the absolute key issue at the moment," said an equities trader.
The Bank of England is widely forecast to leave interest rates at 4.75 percent when its monthly meeting concludes at 1100 GMT on Thursday, after a surprise quarter-point hike in August.
Among the losers, DSG International fell 3.3 percent as investors took profits following strong gains in recent weeks and as analysts said the electrical goods retailer's 5-percent rise in like-for-like sales in the first 16 months of this year was not enough to push further gains. Credit Suisse analysts warned trading conditions might not be so good for the rest of the year.
"We remain cautious on the stock, given an assumed deceleration in the recent strong growth in the TV market, ongoing deflation in PC hardware (and) the potential adverse impact of interest rate rises on consumer spending," analysts said in a note.
US crude oil prices traded around $68 a barrel, just off a 3-1/2-month low struck in the previous session. Royal Dutch Shell shares slipped 0.7 percent and BP lost 1 percent.
Aviva inched up 0.3 percent on speculation of take-over interest from Generali, traders said. Among mid-caps, Gondola Holdings surged 11 percent and headed gainers after the PizzaExpress restaurant owner said it had been approached with a possible offer.
Standard Life and Resolution looked set to enter the FTSE 100 index later this month after a quarterly rejig, data showed. Index compiler FTSE will formally announce the changes to the FTSE UK index series later in the day. Schroders, which is expected to drop out of the index along with Rentokil, fell 3.4 percent.