London sinks as financials weigh

Financial stocks dragged London's FTSE 100 back below the 6,000 level on Tuesday after US service sector data intensified fears of US recession.

The FTSE 100 closed 158.2 points, or 2.6 per cent at 5,868 while the mid-cap FTSE 250 fell 3 per cent to 9,955.3

Schroders was a leading faller, down 7.1 per cent to £10.25, as Morgan Stanley cut its stance on the fund manager from "equal-weight" to "under-weight".

After an analysis of some of the group's funds, the bank said Schroders was the "most exposed to equity mutual fund redemptions, a trend that we think is underestimated by the market". Morgan Stanley also downgraded Aberdeen Asset Management, which fell 6.8 per cent to 137¼p.

Leading banks were weaker, with Royal Bank of Scotland off 5.6 per cent to 383p and Barclays (NYSE:BCS) down 4.3 per cent to 460¾p.

Northern Rock, however, climbed 2.3 per cent to 90¾p as RAB Capital, the company's second-biggest shareholder, said it backed the management-led proposal to rescue the bank rather than a rival offer from a consortium led by Richard Branson's Virgin Group.

Olivant, another of the potential bidders for Northern Rock, pulled out of the running on Monday.

Housebuilders suffered the day's heaviest losses on fears of a sharp downturn in the UK housing market. Taylor Wimpey shed 8.1 per cent to 185p and Persimmon lost 7.3 per cent to 748.3p.

Hammerson led real estate groups lower after downgrades to the sector from HSBC.

The bank downgraded Hammerson and British Land from "neutral" to "underweight" and Land Securities and Brixton Estates from "overweight" to "underweight".

Hammerson fell 6.8 per cent to £10.67, British Land lost 4.8 per cent to 975.3p, Land Securities dropped 4.2 per cent to £15.92 and Brixton shed 4.4 per cent to 333p.

BP was one of only three risers on the FTSE 100 after its drop in quarterly net profit was offset by news that the group would increase its quarterly dividend by 31 per cent and continue to buy back shares.

The profit fall was due to weak refining margins and higher costs, with outweighed the impact of higher oil prices. BP shares rose 0.2 per cent to 542¾p.

"We believe that the sector bounce in the year to date has exacerbated significant downside opportunities," HSBC said.

In the mid-caps, chip designer ARM Holdings fell 20.1 per cent to 94¼p after missing forecasts with a 6 per cent rise in full-year revenues.

The company, which designs chips for Intel, said it was cautious on the short-term outlook for the industry, but said it had entered the year with its order backlog at its highest level ever.

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