A profit warning from Finnish mobile telecoms group Nokia and some bad news on UK inflation ensured another bad session for UK shares yesterday.

The FTSE 100 index followed Monday's 90 point loss with a 56.5 decline to 5,804.0. At its worst, the index was 77.4 points off at 5,783.4.

The underlying rate of inflation (excluding mortgage payments) jumped 0.8 per cent on the month in May to hit an annual rate of 2.4 per cent, only just below the government's target.

Only a few months ago, there was speculation that the rate might drop below 1.5 per cent, necessitating a letter from the governor of the Bank of England to the chancellor to explain why inflation was too low.

The surge in inflation was prompted by a jump in seasonal food prices and higher motoring costs. But analysts warned that the sudden resurgence in inflationary pressure could prompt bad news on the interest rate front. Both gilts and short sterling (the future market's vehicle for speculating on rate changes) fell on the news.

"Food price inflation will subside in coming months," said Darren Winder of UBS Warburg. "But base effects combined with higher petrol prices suggest that underlying inflation will probably blip above 2.5 per cent over the next three months before falling slightly thereafter. Rates can probably be expected to rise to around 6 per cent by next spring, falling back to 5.5 per cent through the second half of the year."

The inflation figures kept the UK market under pressure during the morning and sentiment was then sandbagged by the news from Nokia, which halved its outlook for quarterly sales growth. The Finnish group's shares quickly fell 20 per cent and technology stocks round the world were dragged down in their wake.

Wall Street suffered accordingly with the Dow Jones Industrial Average down more than 100 points and the Nasdaq Composite off more than 50 at the London close. European markets were also sharply lower.

In the UK, Vodafone was the obvious casualty, its heavily-weighted shares dropping 3.7 per cent, knocking around 19 points off the FTSE 100.