The big fall, predicted by a number of City commentators, failed to materialise yesterday. At its worst, the market was down 86 points before bargain hunters made their presence felt, leaving the FTSE index by the close of dealing down 30.8 at 4835.0.

A string of major companies beginning the week without the benefit of the dividend payout was also responsible for the drop.

Traders said there was no sign of panic selling and the current correction was seen as a healthy development with relatively few shares changing hands.

A slight recovery on Wall Street in early trading also helped alleviate worries in the City.

The fall had been expected by City watchers, who said European markets would post losses to catch up with the heavy fall in New York, most of which took place after the London and continental bourses had shut.

However, while analysts agreed further volatility was likely in the London market over the coming days, a crash on the scale of 1987 was not about to happen.

Mr Matthew Orr from stockbrokers Killik & Co said the market's fall was nothing to worry about for long-term investors.

Stock market volatility was now much more of a regular occurrence, he stressed.

"Everybody should recognise we are in world where stock markets can swing around 2 per cent or 3 per cent in a day," he said.

He believed predictions of a likely stock market crash were wrong given the fact that interest rates had probably neared their peak in this part of the cycle and the likelihood that the pound could fall sharply. That alone would be a major benefit to exporters.

One senior equity strategist said the market had run away with itself in recent weeks and was looking over-valued. The recent fall was needed to calm things down.

City experts pointed out that part of Friday's fall was due to investors switching out of big financial, pharmaceutical and oil stocks into more medium-sized companies which have lagged behind the FTSE-100 index's surge.

Central to the way the market behaves will be British economic figures and any decision by the US authorities tomorrow to raise interest rates.

Half-year figures from Argos failed to catch the City's imagination. The group warned that current sales growth was unsustainable and its shares slipped 1/2p to 621 1/2p.

As in late trading on Friday, financial stocks took a pounding. Midland Bank parent HSBC dropped 72p to £20.97 as it went ex-dividend, Halifax which reports maiden interim figures since its stock market flotation later this week, was down 2p at 719 1/2p and Royal Bank of Scotland dropped 51/2p to 596p.

Barclays was one of a long list of companies trading ex-dividend. It was down 15 1/2p at £13.82 1/2.