Continued worries about the health of the US economy and a big drop in the UK market's largest stock gave equities a buffeting yesterday, sending all the main indices lower.

The Federal Reserve's surprise interest rate cut last week initially gave global equity markets a substantial lift. Since then, however, doubts have emerged.

Investors are concerned that the scale and timing of the cut may indicate either that the US economy is in a far worse condition than was thought or that a financial crisis is about to emerge.

Morgan Stanley Dean Witter added to the worries yesterday by forecasting that the US would experience a recession (two quarters of falling output) in the first half of this year. Wall Street fell sharply on Friday and both the Dow Jones Industrial Average and the Nasdaq Composite were lower in early trading yesterday.

Adding to London's problems was the decision by Hutchison Whampoa, the Hong Kong conglomerate, to issue a bond convertible into part of its remaining stake in Vodafone, the mobile phone group. Faced with the potential stock overhang, Vodafone shares traded lower all day, knocking almost 40 points off the FTSE 100 index.

Even the return of bid activity with Lafarge of France launching an agreed offer for Blue Circle failed to do much to lift spirits.

The FTSE 100 index closed down 48.5. The other indices, lacking the dead weight of Vodafone, suffered smaller losses. The Techmark 100 was down 10.34 to 2,438.29.

ARM Holdings and Autonomy were two of the three best-performing FTSE 100 stocks but Vodafone, Energis and Capita were three of the four worst. IDS, the financial software company, was the latest group to see its share price hammered by a profits warning.

The UK market seems unlikely to get any immediate relief from the Bank of England's meeting this week.

Richard Iley, of ABN Amro, said: "Another month of unchanged monetary policy looks likely. Domestic fundamentals continue to point toward the need for higher interest rates.