Markets slump under fears of rate rise

Stock markets took a pounding today as fears of higher interest rates continued to chip away at investor confidence.

Some £35bn was wiped off leading UK shares as the FTSE 100 fell 143.4 points, 2.5%, to 5562.9. The FTSE is now below the 5618 level at which it started in 2006 and some 9.4% below the April peak of 6137 points.

The mining sector, which had led the FTSE's charge earlier in the year, bore the brunt of today's retreat. Rio Tinto , Xstrata and BHP Billiton lost 6% to 7% as copper fell heavily and gold slid below $620 (£336) an ounce.

Oil companies also took a hit. BP and Royal Dutch Shell lost more than 3% of their value as the crude price fell below $70 a barrel on news of the killing by US forces of Abu Musab al-Zarqawi, the al-Qaida leader in Iraq.

Markets in continental Europe suffered losses on a similar scale to London with Frankfurt down 160 points, 2.9%, at 5383.28, and Paris finishing 140.43 points, 2.9%, lower at 4684.

The rot also spread to the US. In midday trading, the Dow plunged 143 points, 1.3%, to 10787.54. The Dow is about 70 points away from falling into negative territory for 2006. Overnight in Japan, the Nikkei recorded its biggest one-day percentage loss in a year.

This week's heavy losses follow indications that the Federal Reserve Board may push up interest rates to contain inflation. A rise in interest rates would slow down economic activity and curb company profits.

"I suspect the market is exaggerating the downside move amid fears that the Fed may overextend its tightening policy and dampen economic activity more than anticipated," said Peter Cardillo, chief strategist at SW Bach.

However, he added that a rebound in trading volume could be a sign that the market is reaching a near-term low point.