THE market began to show its true colours yesterday as the bid premium from the water sector drained away. With a depressing lead from the US and no impetus from domestic corporate events or economic statistics, British equities did not have a chance.

The Footsie opened down 8.7 and essentially kept on falling. It rallied slightly from the lower depths achieved in the early afternoon but still closed 29 down at 3746.7.

The rot set in late on Wednesday after Ms Susan Phillips, a Federal Reserve Board governor, pointed to the danger signs for US inflation.

Subsequently, the Dow Jones Industrial Average fell almost 36 points. The differential between the Dow and the Footsie is so great that under normal circumstances that kind of correction should be irrelevant to London.

However, British investors are becoming increasingly skittish and in need of stronger and stronger adrenalin shots to keep their nerves.

A £1.5 billion sterling takeover offer by Scottish Power earlier in the week may have sparked off a bid war and sent the price of Southern Water soaring by 45 per cent. But it was barely enough to get the rest of the market out of bed.

By yesterday, it was almost as though the bid had never happened. Some potential targets within the water sector were trading higher but the broad market chose to focus elsewhere.

The comments of Ms Phillips had hit US Treasury bonds and also sent the dollar sharply lower. This knocked on to the British government bond market, where the 10 year benchmark issue was down by more than half a point.

Revised gross domestic product figures from the US announced in the afternoon took some of the sting out of the inflationary concerns.