THERE was an element of fiddling while Rome burned in the London market yesterday.

As the London season opened, many City desks were deserted for the greener and more speculative arena of Ascot.

At the same time, those who were left had time to consider the implications of a possible abolition of the 20 per cent tax credit on dividend payments.

And some stark press comment prompted strategists to suggest that an 8 per cent correction would not be a melodramatic scenario. The message took a while to filter through - perhaps because the market was also concentrating on derivatives expiries and anticipating economic data from the US. But when it did, it turned an early gain of 13.0 on the FTSE 100 index into a fall of 62.9 to 4,682.2 on turnover of 840 million shares at 6 p.m.

The FTSE Mid-250 and SmallCap indices, which are less attractive to the pension funds and charities currently benefiting from tax credits, were less affected. They fell 19.1 to 4,538.0 and 4.0 to 2,279.8 respectively.

Early on, there was considerable intra-market jockeying ahead of the mid-morning expiry of Footsie options as well as the individual stock options. Basket trading and arbitraging ensured that Footsie was showing a comfortable gain. Then it began to lose ground with gathering force.

There was some caution about the latest consumer price index figure from the US. In fact, the headline and core readings came in below the consensus forecasts as did the figure for May housing starts.

And while the US long bond was lower for a while and restraining British government bond prices there was no obvious reason for the slippage apart from profit-taking. However, the concern over advance corporation tax credits gnawed at the market's confidence.

Market-makers were actively targeting high-yielding stocks yesterday with particular emphasis on utilities, many of which are still are still under the shadow of regulatory pressure.

Mr Adam Cole of HSBC James Capel said: "The reaction on Monday was very, very modest. If we were really taking it (the ACT change) on board it would represent 300 or 400 Footsie points."

And Mr Peter Warburton of Robert Fleming Securities said: "Tax exempt shareholders stand to lose a considerable amount of money." Footsie has already hit many strategists' end of year targets. Those targets factored in some tightening of tax credits but not the total abolition. While forecasts will be left intact until the budget on July 2nd, they could be scaled back afterwards.

On the other hand, many of the big funds still have huge cash positions and the pressure to buy on the dips is expected to remain.