THE "will they, won't they" conundrum over the chances of a rise in US interest rates kept European markets on edge yesterday and was one of the main restraining factors behind London's poor showing.
There were other worrying factors affecting the British market, however, including on-going concerns about the rumoured clash between the Chancellor of the Exchequer and the Prime Minister over the single European currency.
The British market's main indices were all under pressure throughout the day, with dealers and institutions tending to hold back from buying until there was hard news on the next direction for US interest rates.
With no news from the US Federal Reserve expected until last night, Britain could only take its lead from US markets.
At the end of a tense trading session, the FT-SE 100 index was 9.2 off at 3,910.5 and the market's second-line issues, represented by the FT-SE Mid-250 index, recorded a 6.4 drop to 4,388.2.
There were few pointers to the direction of US interest rates from Wall Street which, along with most European markets, traded uncertainly ahead of news from the Fed meeting.
On Monday, an early 50-point opening fall in the Dow Jones Industrial Average was transformed into a six-point rise, taking the average to a new high. Yesterday, the Dow recorded some early losses, then recovered but slipped to be 10 points lower 90 minutes after London-closed for trading.
Market-makers said the consensus around British dealing desks was that a decision not to change US rates would be viewed bearishly, since markets would worry that the US authorities were not taking pre-emptive action against inflation. A 25 basis points rise, in contrast, would be seen as just right, with the market responding accordingly.
A 50 basis points increase was seen as likely to prompt a sharp sell-off on Wall Street and elsewhere, although the initial reaction would probably be followed by a rally.
A senior trader at one of the leading European securities houses said that London had probably seen the worst of the downside pressure for the time being and also pointed to the continuing flow of institutional funds into London.
"Outside of any shocks, I think we'll rally from here," he said.
The day started well in London, with shares moving ahead before the day's economic news was published. Dealers said the market took the details on the balance of payments and gross domestic product in its stride but then started to lose heart.
At its worst, Footsie came within 4.3 points of the 3,900 level. The financial sectors were among the most active in the market, with the life stocks, Legal & General and Prudential. heavily supported but the banks equally heavily sold.
Turnover at 6 p.m. was 636 million shares. Customer activity on Monday was valued at £1.45 billion.
