A LATE rout in US markets sent shares in London tumbling yesterday as inflationary storm clouds gathered.

Blue chips were marked higher at the start of trading and built up a reasonable gain of 19.8 shortly after midday. The index was helped by two pieces of encouraging corporate news. Firstly Oftel, the telecoms regulator, made conciliatory comments suggesting a kinder ruling on BT price caps than some analysts had feared. The relief factor and subsequent rise in BT's price contributed nearly 4 points to the FTSE 100 index.

And, lower down the scale, Lucas jumped to the top of the FTSE Mid 250 Index after announcing it was merging with Varity of the US.

However, there was very little genuine activity in the market and, as has been the case for some time, it was a story of the derivatives tail wagging the equity dog.

The yield ratio between government bonds and equities allows little latitude at the moment. So, equity investors have been nervously watching the gilts market and tweaking prices through the futures market every time gilts decline.

In turn, bond traders have been keeping a watchful eye on US treasuries, which have been slipping back on growing concerns about resurgent inflation and the possibility that interest rates could actually rise.

Gills, which had been up half a point earlier in the day, lost half of their strength. Then, Footsie futures were sold back. At the official close on Liffe, the contract was trading some 15 points below its estimated fair value premium to the cash market.