'Toxic cocktail' hits blue chip shares

LONDON'S blue chip share index closed at its lowest level for eight months yesterday, below the psychological 5,000 barrier in another dire session for global stock markets.

The FTSE 100 Index slumped 2.5 per cent as a "toxic cocktail" of European debt fears and military tensions in Korea hammered world markets.

The Footsie dived below 5,000, having fallen 150 points at one stage, before rallying slightly to close down 128.93 points at 4,940.68.

On Wall Street, the Dow Jones Industrial Average was nearly 2 per cent down in the first hours of trading, with similar heavy falls across Europe.

News at the weekend of a Spanish bank bail out compounded worries over the European debt crisis, while in Asia there were fears about the threats of military action in Korea and the impact on exporters of the weak euro.

Richard Hunter, head of equities at Hargreaves Lansdown, said: "The toxic cocktail worsens. Continuing fears over the European debt situation stalling the global economic recovery has been exacerbated by the potential of military tensions in Korea."

Europe's embattled single currency was down against the dollar and pound again, with sterling up 0.7 per cent to 1.17 amid the eurozone concerns. The euro fell by about 1 per cent to $1.22.

Among stocks, miners and financials were suffering the most in yesterday's sell-off, with Lloyds Banking Group down 9 per cent, or 4.95p to 50.52p.

Fellow taxpayer-backed player Royal Bank of Scotland dropped 2.67p to 42.7p.

Retail chain Marks & Spencer was caught in the wider declines, with shares down 7.1p to 326.4p despite a 4.6 per cent rise in full-year profits to 632.5 million coming in at the top end of analyst expectations.

Insurance giant Prudential fell 4 per cent as it came under more pressure ahead of its 24.6 billion AIA deal.

The group's shares made their debut in Hong Kong and Singapore markets in a bid to attract new investors for a mammoth share issue, but both listings were down in a tough session for equities. In London, Pru shares fell 19p to 511p.

Water firm Severn Trent flirted with positive territory as the sector bucked the wider falls thanks to better-than-expected results from South West Water owner Pennon. Severn later shed 4p to 1,133p.

However, FTSE 250 constituent Pennon surged 10p to 499.5p after its figures, which revealed a strong performance from waste disposal business Viridor, while a positive broker note on the sector also supported gains.

Elsewhere, chocolate retailer Thorntons took a tumble, down 12 per cent after it warned over profits for the second time this year and announced chief executive Mike Davies was retiring. Its shares dropped 12p to 88p.

Fellow small cap stock Homeserve – a provider of home emergency insurance policies, repair services and warranty services – failed to hold on to early gains, closing down 1p at 1,909p in spite of a 13 per cent rise in full-year profits to 100.6m.

Clyde Process Solutions bucked the dismal day on the markets, closing up 3.5p at 45.5p after chairman Jim McColl unveiled record operating profits.