Portuguese problems weigh on FTSE

THE Footsie was dragged down yesterday after fears were reignited that Portugal may become the latest European Union country to need a bail-out.

Heavyweight banking stocks were pushed into negative territory by the news, while mining stocks also suffered, which left the FTSE 100 Index down 32.28 points at 6,020.01.

The 0.5 per cent drop extended Wednesday's retreat after the index had hit its best closing level since May 2008 on Tuesday.

Yet the Footsie is still up 2 per cent in 2011 - after a 9 per cent rise last year - and many analysts remain fairly upbeat about prospects for equities.

Peter Dixon, economist at Commerzbank, said: "There's a bit of nervousness around now, but there are always going to be a couple of disappointments. Overall earnings have gone reasonably well. There's no reason for the market to be depressed for a long period of time."

The concerns came as Portuguese ten-year bond yields jumped to 7.35 per cent - the highest since the launch of the euro in January 1999.

Fears resurfaced that the Iberian country would be forced to follow in the footsteps of Greece and Ireland and turn to the European Union for bail-out funds to revive its troubled economy. Barclays, which is heavily exposed to the Iberian peninsula, fell 1 per cent or 3.15p to 313.3p and HSBC was down 8p to 715p. Lloyds Banking Group, however, was up 0.36p to 65.8p.

In London, the Bank of England decided to hold interest rates at their historic low of 0.5 per cent, but this had little impact on stock exchange trading.

Despite the decision, which was widely expected, the pound was up at $1.61 against the dollar and to €1.18 against the euro.

The single currency was dragged down by the news from Portugal. Sentiment in the US was also dampened by a raft of disappointing earnings reports from the likes of drinks giant Pepsi and computer network manufacturer Cisco.

Miners were on the back foot as commodity prices continued to drop in the wake of China's decision earlier this week to raise interest rates. Rio Tinto was down 2 per cent - or 110p to 4,549p - while Antofagasta shed 26p to 1,430p and Xstrata was off 25p at 1,442.5p.

In corporate news, traders were disappointed by half-year results from drinks giant Diageo, which came in short of expectations and was the Footsie's biggest faller. Shares in Scotland's largest whisky producer fell 4.6 per cent or 58p to 1,195p.

The market was also concerned about the impact of continuing economic weakness in Europe, where Diageo's net sales fell 3 per cent in the half-year.

Elsewhere, traders were shaken by a profit warning from Air France-KLM and pulled out of British Airways parent International Consolidated Airlines Group.Shares fell 3 per cent or 8.6p to 251p.

Among the Scottish stocks, Edinburgh-based oil and gas explorer Cairn Energy fell 2.4 per cent or 9.8p to 408p despite its Indian subsidiary posting a seven-fold increase in third-quarter profit to 278m.

Perth-based investment manager Braveheart surrendered some of Wednesday's gains - closing down 2.5p at 35p - after a string of recent funding rounds in its portfolio of companies.