After its fourth successive fall, the FTSE 100 index was hovering on the edge of fragile support levels. From its peak less than three weeks ago to yesterday's low, the blue-chip index had fallen 10.2 per cent.

A correction is classified as a slide of 10 per cent and usually stimulates buying activity. Strategists said any further significant weakness could push the market into a new, lower trading range and wipe out all the gains achieved this year.

"We've trimmed the puppy fat. What comes off the market from here on is just muscle and bone," said one senior dealer.

Footsie closed 38.4 lower at 5,594.1, while the FTSE Mid-250 fell 10.5 to 5311.0 and the SmallCap 1.9 to 2,413.3.

However, at these levels, news that is bad for most people is good for the stock market. The latest Confederation of British Industry survey on retail sales showed growth had slowed to its lowest level for more than three years.

The service sector makes up the bulk of the British economy and this survey provides the final confirmation for those who needed it that the economy is slowing down.

That figure added weight to the latest information on the downturn in manufacturing and built on the argument that a succession of rate rises are finally beginning to bite. Mr Richard Kersley of Credit Suisse First Boston, one of the most optimistic brokers with an end-of-year forecast of 6,600, says the augury points to recovery.

"Anyone concerned about a two-speed economy should take some comfort from the figures. And money markets reflect the view that interest rates have peaked," he said. Mr Kersley was further encouraged by the Bank of England's decision to leave interest rates unchanged.

Few economists expected a rise and when the monetary policy committee's decision was announced at midday the market barely registered its acknowledgment.

Nevertheless, some saw the decision as the beginning of the end of bad times. Mr Kevin Adams of Barclays Capital said in his latest research: "The market seems to be coming to the view that whatever the MPC decides at its August meeting, the big move from here is down."

The market appeared to take that view and run with it. Buying was boosted by speculations that low valuations would produce a big bid, possibly in the water sector. From an intra-day fall of 85 points, Footsie shrugged off pressure from the futures markets to rally steadily throughout the rest of the day.

Mr David Schwartz, the stock market historian, says the idea that markets fall over the summer because of lack of interest is a myth.

"August is the third most profitable month for investors. Share prices rise 1.24 per cent in the average year," says Mr Schwartz in his stock market handbook.

That would leave Footsie just 15 points shy of 6,000 by the end of the month. However, he adds that that strength is primarily a bull market phenomenon.

Elsewhere in the sector, HSBC fell 50p to £14.05 and Lloyds TSB dropped 24p to 778p. But following previous falls, NatWest gained 35p to £11.75 and Standard Chartered rose 17p to 620p.

Insurance company Royal & Sun Alliance disappointed many analysts with pre-tax profits down sharply from £556 million to £437 million after enormous weather related losses.

The company blamed El Nino in the Americas and the Canadian ice storms, while further weather damage hit its Asia Pacific book of business. Shares fell 11 1/2p to 623 1/2p.

The City's favourite merger candidate, drugs group Zeneca, reported a sharp drop in its half-year figures. Exchange rates wiped £81 million off operating profits and the company warned sterling's strength would dent annual profits by £110 million.

Turnover by 6 p.m. was 837.2 million shares, with volume weighted towards Footsie stocks.