Market rattled by contraction shock

The FTSE 100 index closed down 0.4 per cent yesterday after official figures revealed the UK economy shrank in the fourth quarter, delivering a blow to recovery hopes.

The Footsie closed 26.14 points lower at 5,917.71 after the Office for National Statistics said gross domestic product declined by a shock 0.5 per cent between October and December.

But it was the pound that took the greater punishment. Sterling was down more than 1.5 per cent against the dollar at $1.58 and dropped 1.2 per cent to €1.15 against the euro as traders bet the GDP news would put back the timing of any rise in interest rates.

Jason Gaywood, senior consultant at currency specialists HiFX, said: "Sterling collapsed immediately after the release amid fears that we are now set to face the dreaded 'double-dip recession'.

"This nightmare scenario puts both the government and the monetary policy committee in almost impossible situations in the short term. The market is likely to continue punishing the pound as uncertainty remains as to interest rates in the UK and the wellbeing of the broader economy."

Unsurprisingly, consumer-facing stocks were among those unnerved by the weaker growth prospects. Next dropped 67p to 2,075p, Marks & Spencer fell 8p to 361.4p and Tesco declined 6.5p to 399p.

In the banking sector, Lloyds Banking Group eased 1.9p to 63.2p and Barclays weakened 2.1p to 298.5p. Royal Bank of Scotland dropped 0.8p to 43.3p as part of the sector's collective punishment.

The market was also hampered by weaker commodity stocks as investors continued to worry about possible moves by China to curb soaring economic growth. Randgold Resources was among the fallers, dropping 180p to 4,855p, while Kazakhmys fell 58p to 1,500p.

One of the most significant moves in the top flight came from BSkyB after the UK Culture Secretary kept the door ajar for News Corporation's planned takeover of the broadcasting giant.

With the company also due to post strong half-year results on Thursday, BSkyB shares lifted 2p to 752p.

Fashion house Burberry topped the risers' board, after peer Luxottica, which manufactures sunglasses for luxury brands such as Armani and Ray-Ban, posted a bullish trading update.Burberry jumped more than 3 per cent or 33p to 1,063p.

Guinness and Smirnoff vodka maker Diageo saw shares climb 20p to 1,241p after a report revealed the US spirits market had seen signs of recovery in 2010, with sales up 2 per cent.

In the FTSE 250 Index, shares in Imperial Leather soap maker PZ Cussons fell 7 per cent after it reported largely flat half-year profits and said it was cautious about prospects for the full year due to discounting by UK retailers and price hikes.

The company, which dropped 26.6p to 352.6p, is battling against soaring input costs such as palm oil, a key ingredient in many of its products.

Among the Scottish stocks, Stagecoach was up 3p to 206.2p as it announced that Global Aegon Asset Management had built up a 5 per cent-plus stake in the company.