European debt fears take their toll

BANKS dragged the Footsie lower yesterday as fears over Italy's finances and European debt contagion weighed heavily on investors' minds.

The FTSE 100 index fell 60.2 points, or 1 per cent, to close at 5,868.96, recovering from a 120-point fall earlier in the session thanks to an up-beat opening on Wall Street.

Will Hedden, sales trader at IG Index, said: "Today was definitely not a day for the fainthearted. The summer shutdown seems like a lifetime away right now and some traders are in need of a holiday after all of today's excitement."

Speculation that Italy and even Spain could require an European Union-funded bailout caused investors to flee risky assets, while the euro was also hit by the debt fears, falling against most major currencies.

Improved cost-of-living figures, which saw UK inflation drop unexpectedly from 4.5 per cent to 4.2 per cent in June, and weak trade figures raised the prospect of further quantitative easing, which affected sterling.

The single currency fell to €1.138 against the pound, while sterling dropped to $1.594 against the dollar.

Banks were hit by worries over their exposure to sovereign debts. Lloyds Banking Group closed 1p lower at 43.9p, Barclays dropped 6.3p to 227.7p - having hit an intra-day low of 218.5p - though Royal Bank of Scotland rose 0.3p at 36p.

Aviva, which generated sales of more than 1 billion from operations in Italy and Spain in the first three months of this year, dropped 6.2p to 412.9p.

Meanwhile, BSkyB slipped a further 23.5p to 692p after Culture Secretary Jeremy Hunt referred News Corp's proposed bid for total control of the broadcaster to the Competition Commission - which will delay the move by up to a year.

Brokers Investec and Cannacord Genuity both cut their price targets for BSkyB in light of the most recent developments to 746p from 810p and 760p from 800p, respectively. In the United States, News Corp launched a $5bn (3.1bn) share buy-back.

High street bellwether Marks & Spencer was one of a handful of stocks to defy the gloom ahead of what is expected to be a positive first-quarter trading update today.

The retailer is expected to report a 1.5 per cent increase in like-for-like sales in the 13 weeks to the end of June, up from the 0.1 per cent increase in the previous quarter. Shares were ahead 4.3p at 373p.

Outside the top flight, shares in travel group Thomas Cook slumped 28 per cent after it said that full-year profits will be about 60 million lower than expected as a result of the squeeze in consumer spending and turmoil in the Middle East and North Africa. Shares fell 34.9p to 87.9p, while rival TUI Travel dropped 16.5p to 204.7p, a fall of 7 per cent.

The UK's biggest sandwich maker yesterday swooped for M&S food supplier Uniq, wrapping up the last remaining slice of the former Unigate empire.The Dublin-based Greencore, which serves some of the UK's biggest supermarkets and recently missed out on Fox's biscuits owner Northern Foods, has offered 113m for the UK business, sending Uniq shares up 23 per cent to 94.3p, against an offer price of 96p.