The UK stock market was on the retreat from the outset yesterday as traders and investors digested Tuesday's half-percentage point jump in US interest rates.

The move by the US Federal Reserve had been expected and Wall Street had taken it well during Tuesday's session. But UK investors took fright at the potential for further rate increases, both in the US and Europe, and sentiment took a further dive when it became clear as Wall Street opened yesterday that US shares were going to trade lower. By the close in London, the Dow Jones was down 170 points and the Nasdaq was off 90. The FTSE 100 index inched up 3.2 to 6,321.6 in the first minute of trading, but it was downhill from then on. By the close, the blue-chip benchmark was 122.2 lower at 6,198.2.

The day's UK economic news was fairly positive, but it didn't have much impact on the market. Average earnings numbers for March showed 5.8 per cent annual growth, higher than the Bank of England would like but still slightly below analysts' expectations.

And the minutes of the monetary policy committee's meeting earlier this month showed that the nine members were unanimous in voting for unchanged rates. Even those members who had been hawkish were swayed by slower-than-expected first-quarter growth and the strong pound.

International factors proved more important than the domestic news, however, with most European markets also down sharply.

There was no help from the latest big Footsie merger, with shares in both Granada and Compass falling on news of the deal.

QXL.com, which announced a link-up with Ricardo of Germany on Tuesday, also saw its shares suffer.

Technology shares continued their volatile recent performance, with the Techmark 100 index shedding all of Tuesday's gains to end 119.5 down at 3,397.44. That leaves it 41 per cent below its early March peak.

But the medium and smaller sized stocks held up rather better. The FTSE 250 fell 29.4 to 6,293.5 and the SmallCap dropped 5.4 to 3,222.8. The Merrill Lynch monthly survey of UK fund managers found that there was increased optimism about UK equities, with buyers outweighing sellers by 17 percentage points, up from 9 per cent in April.