The British stock market made a brief assault on its all-time peaks yesterday, and then turned tail and fled. Having seen the FTSE 100 index climb to the top of its recent 4,800-5,100 range, it seems clear that investors decided to take profits.

The mood in London was not helped by the international background. European markets were mostly flat to lower and, on Wall Street, the Dow Jones Industrial Average, which closed just below 8,000 on Monday, was more than 20 points lower by the end of the London session.

Gilts also shed a little of their recent strength, with the benchmark 10-year issue dropping by around an eighth of a point. And there were further signs of a rebound in sterling, with the pound gaining two pfennigs to DM2.8948 and jumping from 100.8 to 101.4 on the trade-weighted index.

However, the small and medium-sized stocks - the usual suspects to be sold when investors are worried about the pound - outperformed the leaders. The FTSE Mid-250 index gained 2.7 to 4,709.9 while the SmallCap index rose 3.2 to 2,300.

The FTSE 100 index finished 48.2 points lower at 5,021.5, not far off its low for the day, and nearly wiping out all of Monday's gains.

The picture looked quite different at the start of trading when Footsie jumped 19.4 points to 5,095.1, just 0.2 off its all-time intra-day high. The All-Share actually managed a new intra-day peak of 2,389.45.

But Footsie proved incapable of sustaining its early gains. There was talk in the markets of a succession of programme trades. The December future was also volatile, with the contract opening at a large premium to fair value which was eroded by the end.

The day's economic news - a small upward revision to second quarter gross domestic product and a second quarter current account surplus - was not seen as having much effect.

Volume was fairly healthy by recent standards with 811.2 million shares traded by the 6 p.m. count, of which 52 per cent was in non-Footsie stocks.

Some analysts are still optimistic that Footsie can break out of its range. Mr Philip Isherwood, UK strategist at Dresdner Kleinwort Benson, said: "The recent rally has been driven by bond markets. You will get a trigger move when it becomes clear that interest rates have peaked. The ratio between earnings yields and short-term rates will then look attractive and at that point, there will be little point in holding cash."

The peak in interest rates is near, according to Mr Geoffrey Dicks, UK economist at NatWest Markets.

He thinks that growth is set to slow in 1998 and added: "It is still possible that the MPC (monetary policy committee) will raise rates one more time in November but we are confident that in a year's time interest rates will be falling."

Short sterling futures currently point to interest rates of 7 per cent by end-1998.