A FRESH burst of strength in sterling, much of which derived from a growing conviction that British interest rates will be lifted soon, proved an effective deterrent to buyers of British equities.
There was further unease after Abbey National hoisted its mortgage rates by a quarter of a percentage point, a move expected to be followed by other lenders.
Share prices, which looked vulnerable from the outset, came under further pressure when Wall Street opened lower, with the Dow Jones Industrial Average sliding more than 40 points in early trading.
By the close, the FTSE 100 index had recouped some of its earlier losses but nevertheless was 19.5 lower at 4038.5.
The second tier index, the FTSE Mid 250, held up relatively well, as good gains in the utilities sector especially the regional electricity stocks, helped offset the damage wrought by a surprise profits warning from Racal Electronics.
The 250 index settled 13.7 off at 4414.8, while the SmallCap index eased 1.6 to 2160.0. A weaker than expected purchasing managers index for November only partly alleviated the interest rate fears, which are sure to continue until the December 11th monetary policy meeting between Mr Kenneth Clarke, the Chancellor, and Mr Eddie George, governor of the Bank of England.
Dealers insisted, however, that the fall in equity prices owed more to a defensive mark down by marketmakers rather than to any weight of selling pressure.
It was also pointed out that the gilt equity yield ratio fell below two on Friday equities are generally regarded as looking cheap relative to gilts when the ratio slips below that level.
Turnover in London's equity market, which fell below the £1 billion mark in terms of customer business on last Thursday and Friday, looked almost certain to extend that trend to a third consecutive session. At the 6 p.m. count, turnover came out at a lowly 553.8 million shares.
The British equity strategy team at BZW pointed out that sterling's strength "continues to cast a sizeable shadow over prospects for the market. We would fear that analysts' forecasts still have to catch up with what sterling has done so far. Year end round ups with, companies will probably be the catalyst for another round of downgrades."
The day's company news was largely positive, apart from the Racal warning, which sent the shares down by 18 per cent.
Scottish & Newcastle was the best Footsie performer, responding to an excellent set of interim figures accompanied by news of a good start to the second half.
Abbey Life and Lloyds TSB were among the biggest Footsie winners as the market warmed to the prospect of higher margins.
