Markets: Stress tests take shine off stunning growth

Stunning growth from the UK's economy was overshadowed by the stress test results for European banks yesterday as the FTSE 100 index stuck close to its opening mark.

The estimated 1.1 per cent gross domestic product (GDP) advance between April and June - the highest for more than four years - was driven by services and construction firms, although growth is set to slow as deficit-tackling measures kick in.

Traders were in "wait and see" mode for much of the day ahead of the bank stress test results, which were published after the close. The top flight finished 1.19 points lower at 5,312.62 after a nervy session.

With so many Footsie firms operating outside the UK, the FTSE 250 is often seen as a more accurate reflection of the British economy.

The second tier closed up 90.49 points at 10,093.67 on the back of the strong GDP figures.

Mark O'Sullivan, director of dealing at Currencies Direct, said: "What seems to have occurred is a compromise amongst European banking regulators, with many questioning if the bar had been set way too low in testing the European banking sector.

"In the coming weeks, it will be the interbank lending markets that will have the real answer as to whether confidence has returned to the banks."

The Dow Jones industrial average made some headway in early trading after more forecast-topping figures from US companies. Results from the likes of Ford, Microsoft and American Express pleased analysts.

Sterling gained ground following the GDP estimates as markets absorbed a heightened chance of rate rises. The pound ticked above $1.54 against the dollar and approached €1.20 against the euro.

Unsurprisingly, banks were in sharp focus in the top flight, although most financials were among the blue-chip losers. HSBC fell 8.8p to 646.2p, Standard Chartered shed 18p to 1,824p, and Barclays was 1.65p cheaper at 302p.

The Financial Services Authority had already said that it expected British banks to pass the stress tests, having subjected them to more stringent tests.

Stronger mining stocks and a gain of 1 per cent for mobile phone giant Vodafone helped offset some of the investor caution. Vodafone gained 1.5p to 150.55p after it reported its first growth in service revenues since the global recession hit.

Elsewhere in the telecoms sector, BT shares were lower after the regulator ruled out changes that would have allowed the company to raise wholesale prices in order to plug the huge deficit in its pension fund. The stock fell 0.3p to 140.7p.

TalkTalk - one of BT's rivals let off the hook by the Ofcom proposal - rose 0.5p to 120p in the FTSE 250, while satellite television, telephone and broadband BSkyB also lifted 2p to 702p in the top flight.

In the FTSE 250, Aberdeen-based oil and gas firm Dana Petroleum added 201p or 13 per cent to close at 1,706p although its Korean suitor said prior to close it had not yet received a "satisfactory response" to its latest bid.

Technology group ARM Holdings was the biggest FTSE 100 riser, up 12 per cent or 36.8p to 353.3p after the chip designer announced a licensing deal with software giant Microsoft.