A sharp sell-off on Wall Street on Monday and again at the outset of US trading yesterday brought a substantial, if not totally unexpected, correction across global markets.

The urge to take profits was given a further push by a series of gloomy economic reports in Britain, Europe and the US that showed manufacturing sectors were under continued pressure. Interest rate cuts and merger activity have allowed investors to ignore the bad news on corporate earnings.

Such was the extent of the US weakness yesterday, at least at the opening when the Dow dropped almost 130 points, that the FTSE 100 suffered its worst percentage fall this year, sliding 3.6 per cent or 206.4 to 5,537.5.

It was also the third worst points fall in the FTSE 100's history. Not long after London closed, the Dow staged a powerful rally to show only a 25-point slide.

The FTSE 250, meanwhile, lost 1.6 per cent or 80.3 to 4,821.4, and the FTSE Small-Cap 1.2 per cent, 25.5, to 2,039.5. "The only surprise about the shake-out is that it has taken so long to materialise," said one market-maker. Wall Street's weakness, which saw the Dow finish 216 points lower on Monday, stemmed from some heavy selling of Internet stocks.

The recent rise has taken place against a backdrop of big bids and mergers, especially in the oil and banking sectors.

There were also doubts about the chance for another interest rate cut in Britain after next week's meeting of the Bank of England's monetary policy committee.

Losses in London stretched across all sectors but were especially severe in the financial areas.