THE negative pressures hitting London stocks continued to build up yesterday, with the market displaying extreme nervousness for the second day running ahead of the outcome of the US Federal Reserve's Open Market Committee meeting.

With big British institutions once again refusing to get involved in the market until the short-term direction of US interest rates is established, it was left to smaller investors and marketmakers to determine trends.

The British equity market was not helped by the weakness of the dollar, which was viewed as damaging for profits of the big dollar earners.

Equities also refused to respond to the positive outcome of the latest gilts auction, involving the sale of £1.5 billion worth of five-year bonds, which was covered three times. The encouraging result augured well for the auction of a similar amount of 25-year stock tomorrow.

Dealers said London was also becoming increasingly unsettled by the prospect of a tax-raising Budget from the new chancellor, Mr Gordon Brown, possibly as early as June 10th.

The FTSE 100 index managed to edge off its lowest levels just before the end of the session but still fell 37.7 to 4607.5. At its worst, Footsie's hold on the 4600 level was seriously threatened; it dropped to 4600.4 before embarking on a modest rally. Over the past two sessions, Footsie has dropped 86.4, or 1.8 per cent.

Other FTSE indices were similarly weak, but held up well in the face of the latest sell-off in the leaders. The FTSE 250 closed 21.4 off at 4489.0, a two-day decline of 0.8 per cent, while the FTSE SmallCap gave up 7.0 to 2304.5. The FTSE All-Share index, in which the leaders have a substantial weighting, gave up 15.77, or 0.7 per cent, to 2196.14.

Wall Street added to London's discomfort yesterday by falling more than 70 points shortly after trading commenced. one London marketmaker said markets on both sides on the Atlantic had become extremely anxious about the response of global markets to any shift in US rates.

"The problem is that investors will remember that Wall Street dipped almost 10 per cent after the March rate rise; if the Fed goes for another 25 basis points the fear is that we'll tumble on the news; on the other hand, if the Fed holds fire, then some in the market think the next move on rates will be a 50 basis points increase," he said.

Turnover came in modestly higher at 740.6 million shares.