Britain's top share index ended 0.44 percent lower on Tuesday, as a corruption probe hit stock in BAE Systems and banking stocks struggled as concerns over subprime mortgages cast their shadow. The FTSE 100 benchmark ended down 29.1 points at 6,559.3, back in negative territory after breaking a five-day losing streak on Monday, but well off its day low of 6,539.9 as recovering US indexes lent some support.
The British benchmark, seen as more defensive than other big European rivals, outperformed both Germany and France. "Equities have lost a bit of momentum as investors consider their risk appetite," said Commerzbank strategist Peter Dixon. "Subprime mortgages is one factor, but it's a bit more nebulous than that. I can't see any macro trigger to push stocks up... it's hard to see anything that breaks the trend of sideways to lower moves," he said.
BAE Systems plunged 8 percent to top the FTSE 100 losers after Europe's biggest military contractor said the US Department of Justice had launched an investigation over its compliance with anti-corruption laws.
Stock in peer Rolls Royce slipped 2.2 percent. British stocks have risen 5.4 percent so far this year, helped by merger and acquisition activity and broadly strong earnings. A Reuters poll published on Tuesday forecast the FTSE 100 rising to 6,900 by end-2007, up 10.9 percent on the year, a similar increase to last year.
According to Reuters Estimates, earnings are expected to rise 7.2 percent for British companies this year, with technology and basic materials sectors showing the largest year-on-year gains.
Confectionery group Cadbury Schweppes was hurt by a downgrade from Citigroup, which cut its rating to "hold" from "buy" and said the possibility of a private equity bid for the company was not "overly compelling". Cadbury fell 1.4 percent.
Shares in Persimmon eased 1.7 percent after Merrill Lynch and Credit Suisse cut their price target on the British housebuilder. Also on the downside, Sage shed 2 percent after Credit Suisse downgraded its recommendation on the software company to "neutral" from "outperform" and cut its price target to 266 pence from 285 pence.
Banks contributed most to the index's fall. HSBC, which has been hit by bad debts at its US mortgage unit, slipped 0.9 percent, making it the second-biggest negative weight on the FTSE after BAE. Subprime mortgages have been at the centre of investor worries this month, with Bear Stearns moving to bail out a hedge fund it manages that is heavily invested in the subprime sector.
Barclays lost 1.3 percent as its chances of winning a costly take-over battle for ABN Amro were seen to have been boosted, with a Dutch Supreme Court adviser saying ABN could sell its US arm without a shareholder vote. But Royal Bank of Scotland, which is also vying to take control of the Dutch bank, gained 0.2 percent.
Among other gainers, Vodafone advanced 1.5 percent after the Financial Times said activist shareholder Efficient Capital Structures may press the company to spin off its stake in US unit Verizon Wireless stake. BT Group gained 1.7 percent.
Experian Group climbed 1.9 percent after the British credit information firm said it was buying a 65 percent stake in Brazilian credit bureau Serasa for $1.2 billion to give it control of three of the top five credit bureaux world-wide.