Markets continue downward spiral

Another wave of selling hit markets today as fears over inflation and rising interest rates continued to undermine investor confidence.

European shares ended sharply lower after losses in Asia, where Kong's Hang Seng index lost 189 points and Tokyo's Nikkei fell 297 points.

The FTSE 100 index of leading UK shares finished down 124.7 points, or 2.2%, at 5532.70, while Paris and Frankfurt were both down more than 130 points each. The plunge in European shares accelerated when Wall Street provided little support. In lunchtime trading, the Dow Jones industrial average was down 73 points at 11071.1.

The FTSE hit a five-year high only a few weeks ago, driven by surging commodity prices, strong corporate earnings and merger activity. But the index has now lost over 600 points in the last two weeks.

Last week, the FTSE finished 254.7 points, or 4.3%, lower - its biggest weekly points drop for almost four years and its largest weekly percentage fall since March 2003.

The sell-off started with the recent release of higher than expected inflation figures in the US. The markets had been expecting the Federal Reserve to stop raising interest rates this year after a series of rises since June 2004. But with inflation apparently on the up, those expectations have been dashed.

The biggest casualties in London were again mining stocks, which had been the main beneficiaries of rising commodity prices.

Kazakhmys suffered an 8.4% drop, losing 88.5p to end at 961p, while Antofagasta slipped 7.3% or 150p to 1915.4p. Xstrata lost 8.7% to finish at 1757p and Anglo American was 6.5% lower at 1893.6p.

Despite the FTSE's retreat some analysts remained upbeat.

Hilary Cook, the director of investment strategy at Barclays Stockbrokers, said that lower commodity prices were driving the falls because the proportion of shares tied up in the sector made the Footsie a "quasi-commodities index".

"Everyone assumed it was going to bounce back but unfortunately commodity prices are in free fall. The market is in an 'all news is bad news' kind of mood," she said.

"This is a buying opportunity and I think we will look back on this in 10 years' time when this won't even register as a blip. You just have to have rather more of an iron stomach than you did six months ago."