Shares fall over fears of US interest rate hike

UK shares fell sharply after opening today mimicking heavy losses in Asia and on Wall Street as US investors braced themselves for higher inflation and higher interest rates.

The FTSE 100 ended down 55.4 points, or 1%, at 5,372.4 as a dip in oil prices towards $62 a barrel weighed on large companies such as BP and Shell, while mining stocks also fell.

In Asia, Tokyo's benchmark Nikkei average fell 2.4%, its biggest drop since April 18.

"US stocks have dropped this much before and Japanese stocks held firm, but what's different this time is that Japanese shares have no stamina left [after their recent rally]," Yasuo Ueki, a market analyst at consultancy Poko Financial Office, told Reuters.

In the US, the Dow Jones industrial average fell over 120 points, or 1.2%, its biggest drop since June 23, and the Nasdaq technology market dropped 1.7%, its steepest decline since April 15.

The reverses on Wall Street came amid fears of growing inflationary pressures which would demand more interest rate rises from the US central bank, the Federal Reserve.

Recent surveys of the manufacturing and service sectors in the US showed businesses were paying sharply higher prices, which would be of concern to the Fed.

"The prospect of the Fed taking a more aggressive stance over interest rates in the coming months has continued to weigh on Wall Street," Matt Buckland, a trader at CMC Markets, told Reuters. "(But) any further slackening of monetary policy on this side of the Atlantic would however stand to lend further support to equities."

In the UK, only a handful of stocks rose in early trading but the leisure group Whitbread and Rank both advanced about 1% on continued bid speculation.

UK interest rates are widely expected to remain unchanged today after the Bank of England announces its decision at midday.