BRITAIN'S benchmark share index slumped 0.7 per cent yesterday, as a poor start to the earnings season on Wall Street helped to turn screens red.
Commodities and banks led the retreat over concerns that China's move to tighten banks' reserve requirements may slow the global economic recovery.
The FTSE 100 index closed down more than 39 points at 5,498.71, dropping back after hitting a 16-month intraday peak at 5,600.48 on Monday.
Stock markets on both sides of the Atlantic languished in negative territory after US aluminium firm Alcoa kicked off results with weaker-than-expected figures.
The news sent UK mining stocks sharply lower, dragging the Footsie down more than 60 points at one stage, before it recovered some ground.
Jimmy Yates, head of equities at CMC Markets, said: "This week is still set to be dominated by US earnings, as the likes of Intel and JP Morgan are still to come. Alcoa's numbers have dampened the mood and left many feeling rather more nervy about the earnings season.
"If the disappointing theme continues, many people's predictions of a strong Q1 could be well wide of the mark."
China's adjustment in the amount of money that banks are required to keep on reserve is the first change in the rate since June 2008.
The development provided the cue for investors to take money off the table, after a strong run for miners and other commodity-based stocks in recent days.
But while it was a lacklustre day for stocks, currency markets saw sterling gain ground, up at $1.62 and 1.11.
Among FTSE 100 miners feeling the heat, the silver specialist Fresnillo was worst off, down 44p at 808p.
Meanwhile, a bumper session for Christmas trading updates was dominated by Tesco, after the supermarket giant revealed stronger-than-expected growth.
Tesco was one of the market's biggest top-flight risers, up 3.15p to 421p, as it said UK like-for-like sales improved 4.9 per cent in the six weeks to 9 January. Shares gained a useful 3 per cent early on, before being caught in the wider market sell-off.
Rival Morrisons has yet to report figures and was boosted by yesterday's update, its shares ahead 3.2p to 293.4p. Sainsbury's added 1.5p to 329.5p.
In the FTSE 250 index, Debenhams shares fell 3.5p to 74.5p, even though it said Christmas profits rose for a second year in a row and it met City hopes with a 0.1 per cent rise in like-for-like sales for the 18 weeks to 2 January.
Game Group suffered a bigger fall of 6 per cent, or 5.9p, to 100p, after it reported a further slide in its sales over the Christmas period and said profits would be below City forecasts at between 87 million and 93m.
The home furnishings firm Dunelm was one of the biggest second-tier fallers, off 21.1p to 373.99p, as it warned that the strong growth rates seen in 2009 would be hard to sustain over the year ahead.
On a brighter note, Howden Joinery owner Galiform rose 12 per cent as the kitchens supplier said it expected profits to beat market forecasts. Shares were 9.3p higher at 87.55p.
Bookmaker Ladbrokes was also in focus after long-time chief executive Chris Bell announced plans to stand down in the summer, although shares lost early gains to close unchanged at 145p.
On the banking front, Royal Bank of Scotland dipped 0.2p to 34.78p and Lloyds Banking Group eased 0.16p to 55.97p, though Barclays inched 1.55p higher to 318.55p. Sector heavyweight HSBC was on the back foot, slipping 1.6p to 728.4p.