The FTSE 100 index finally ended its losing streak yesterday but its rebound was hard going in the face of bad international and domestic news. Monday's 200-point plus drop on Wall Street set the day off to an unpromising start and after the first hour of trading, the market had to cope with disappointing figures on British inflation. But Footsie, after an early 28-point drop below the 5,700 level, overcame all obstacles to end 14 points higher at 5,729.7. It was the blue chip index's first rise in a week.

The strains on the market were illustrated by yet another poor performance from the FTSE 250 index, which followed Monday's 111 point drop with a further 46.5 decline to 5,703.5. The FTSE SmallCap index also shed 22.2 points to 2,708.6.

The retail inflation figures were much worse than the market expected, with the headline annual rate climbing to 4.2 per cent and the underlying rate to 3.2 per cent. The latter was both higher than the consensus forecast of 2.9 per cent and the government target of 2.5 per cent.

On the surface, the numbers looked bad enough to prompt renewed speculation about a further rise in interest rates, although analysts pointed out that one of the problems was a jump in seasonal food prices, which could easily be reversed.

Mr Eddie George, the governor of the Bank of England, said that the British economy was closer to overheating than it had been in a long time. The December short sterling futures contract, the market's vehicle for speculating on interest rate rises, dropped by 20 basis points, indicating that the market was starting to price in yet another quarter of a percentage point rise.

Gilts also took a battering, with the benchmark 10-year issue ending more than a point lower. The bad news for equities was compounded by the support that the rate speculation provided to sterling, which closed above DM2.97 and rose from 105.7 to 106.1 on the trade-weighted index.

With manufacturing companies still complaining about the effect of sterling on their export prospects, and inflation not yet under control, the British economic outlook appeared to be worse than it had been for some time.

Traders are likely to be distinctly nervous about the average earnings numbers, out this morning, which could prove a double whammy ; higher wages could both squeeze profit margins and provoke the Bank to raise rates.

Mr Kevin Gardiner, British strategist at Morgan Stanley Dean Witter, said that "there was a distinct whiff of stagflation in the air. The British market has been hit over the past week by the worsening domestic economic situation and by renewed worries about Asia and in the short term, the outlook is not promising."

"But," added Mr Gardiner, "we think the market will end the year higher than it is now and in the long term, UK benefits will benefit from convergence to European interest rates."

Volume was 931.4 million shares by the 6 p.m. count, of which 55 per cent was in non-Footsie stocks.