Britain's top share index fell more than 1 percent on Wednesday, as downbeat comments by Federal Reserve Chairman Ben Bernanke hit global equities already nervous about the US subprime market crisis. Bernanke said the US housing slump had yet to hit bottom and said the Fed had cut its forecasts for economic growth for this year and next year, in his semi-annual testimony to the US Congress.
The comments also hit the US currency and traders said dollar weakness could be partly to blame for losses in UK mining shares since most mining business is in dollars.
The FTSE 100 index closed 1.4 percent lower, or down 92 points at 6,567.1, with miners knocking almost 16 points off the index. Lonmin was amongst the bigger losers down 3.6 percent, having fallen for most of the week after the world's third-biggest platinum producer cut its full-year sales forecast on Monday. Elsewhere in the sector, Anglo American fell 3.9 percent, Xstrata shed 1.6 percent and BHP Billiton also gave up 2.8 percent.
Rio Tinto, which last week agreed to buy rival Alcan for $38.1 billion, also shed 1 percent. The global miner reported record second-quarter iron ore output, helping offset mixed coal and copper figures as it ramps up production to match further rises in industrial metal prices.
Trade got off to a bad start as worries about the fallout from subprime loans grew after investment Bear Stearns said late Tuesday its two hedge funds that had big bets on the risky mortgages were nearly worthless.
"We are coming off the back of a strong Q2, we are running into Q3 reporting season in the US and also running into quite a delicate macro period as well both in the US and in the UK," said Darren Winder, head of strategy research at Cazenove.
"(There's) continued anxiety about where interest rates will finally peak in the UK and then of course this continued uncertainty about exactly where the US economy is going to." US data was mixed on Wednesday showing higher food costs boosted US consumer prices in June, while an indicator of future home construction was the weakest in a decade.
Mergers and acquisitions offered a cushion, boosting shares in Imperial Tobacco and Sainsbury. Imperial Tobacco advanced 1.5 percent after it agreed to buy Franco-Spanish rival Altadis for 12.6 billion euros in a deal that will propel it to second place from fourth in Europe's cigarette industry.
Sainsbury gained 0.9 percent after Gulf Arab state Qatar made a bid approach for Britain's third-biggest supermarket group. Oil shares fell, despite crude prices rising, with BP down 1 percent and Royal Dutch Shell losing 1.6 percent. In banks, ABN Amro said it would discuss with Barclays the implications of a bid proposal this week by a consortium led by the Royal Bank of Scotland to dislodge Barclays as ABN's preferred merger partner.
Barclays eased 0.5 percent, RBS was down 1.4 percent. But Kelda Group was the top FTSE gainer, up 2 percent, after Merrill Lynch and Citigroup upgraded their rating on the water company, while J.P. Morgan lifted its price target.
Also on the upside, Mitchells & Butlers climbed 1.8 percent after rival pub group JD Wetherspoon said trading was on track to meet forecasts and, like much of the sector, it was in talks about ways to glean more cash from the pub properties it owns.