Last week's late rally was wiped out yesterday as growing fears of a US interest rate rise threw a long shadow over the London market. The FTSE 100 index fell 139 points, or 2.4%, to close at 5,652. The fall was steeper still among mid-cap stocks, with the FTSE 250 down 272.5 points at 9,235.5. Traders said a stream of US economic data due this week was likely to further dominate sentiment in London, with another rollercoaster week a distinct possibility.
Vodafone hoped that its uninspiring annual results, showing the effects of intense competition in its core European markets and a whopping writedown of the old Mannesmann businesses, would be outshone by an increased dividend and the return of £9bn to shareholders. In early trade it worked but by the end of the day the stock was flat at 119.75p as the blue-chip index declined. The cash return, £3bn more than expected, is being done through the issue of special 15p shares. They can be sold back to Vodafone in parts over the next three years or kept for a dividend depending on how investors want to settle their tax bills. Once complete there will be a seven-for-eight share consolidation.
Elsewhere, a retreating market was not unexpected following drifting indices across Europe on Monday as Britain and the US enjoyed a long weekend. Hardest hit were companies with strong US earnings, including the construction materials groups Hanson, down 38p at 642p, and Wolseley, down 63p at £12.02. Although at a three-month low, US consumer confidence figures for May were nevertheless stronger than expected and added to fears that the Federal Reserve was likely to raise rates.
Just five blue-chip stocks ended the day in positive territory, with the takeover target BAA making the only substantial rises, up 52.5p at 873p. The airport operator said it had turned down an improved offer from suitor Ferrovial.
ITV was also among the select band of FTSE 100 stocks to make gains, up 1.25p at 105.25p as traders continued to talk of a possible break-up bid from the private equity house KKR. After the markets closed, however, ITV said it had bought back 400,000 shares for cancellation - a move it would not be permitted if discussions had begun with KKR.
Takeover speculation also provided some protection for BT Group, up 1.25p at 230.25p, with Deutsche Telekom mentioned in weekend papers as a possible predator. The group was also helped by Vodafone's announcement that it is to move into fixed-line telephony - possibly becoming an important wholesale customer for BT.
The steelmaker Corus outperformed the market, falling 3.75p to 382p, as consolidation in the sector appeared to maintain momentum. While Mittal Steel continued to circle Arcelor, it emerged at the weekend that Roman Abramovich, owner of Chelsea football club, is in talks to take a stake in Evraz Group, Russia's largest steelmaker by volume.
Many financial stocks were among the biggest fallers as the equity markets on which they trade tumbled. Old Mutual was down 8.5p at 163.5p; Schroders down 48p at 941p, and Man Group down 105p at £22.60.
Among mid-caps, Soco International disappointed, down 102p to £12.35, after the oil and gas exploration group said its first well on a prospect off Vietnam had not resulted in a significant discovery. The company stressed that the prospect was just one of six off Vietnam in which it had an interest. It expects to be back drilling in September.
ISoft, the healthcare software provider, was gripped by yet more speculation that contract delays would once again affect revenues - with the prospect of a covenant breach. In a newspaper interview yesterday, Lord Warner, the minister for delivery and reform, said of the new NHS IT system: "Some areas of the programme are going well and are ahead of target, but some areas are going more slowly than we would otherwise like." Morgan Stanley, iSoft's corporate adviser, warned this month that further revenue delays might result in covenants being breached.
Analysts at Panmure Gordon focused on the ramifications of reports that MFI, unchanged at 114.5p, was considering pulling out of retailing in Britain. The furniture group has a 30% share of the kitchen market, which could be redistributed - among possible beneficiaries could be Nobia, Homebase and B&Q. Kingfisher, B&Q's parent, closed down 10p at 225.75p.
HelpHire, down 21.5p at 399p, denied it was in talks with the private equity house CBC Capital. The company, which provides replacement cars for insured drivers who have crashed, said media reports had been wide of the mark.
Bucking the market gloom, EMI rose 2.75p to close at 272.5p after Morgan Stanley raised its rating on the stock to "equal weight". The bank noted data suggesting growth in digital music sales was now more than offsetting falls in hard copy sales. Analysts raised growth estimates for the recorded music market from 1.5% to 2% for the next three years.
Among smaller companies, the Aim-listed diamond exploration groups Xceldiam and Petra Diamonds, which hold licences to nearby prospects in northern Angola, signed a cooperation agreement. Xceldiam rose 3p to 46.5p; Petra Diamonds was up 1.5p at 96p.
Up in smoke
Tobacco stocks, usually an attractive prospect in a volatile market, were hit by a research note from analysts at Citigroup, which took a more bearish stance on the sector after a marked worsening in the trading environment in Europe. The analysts said there was little prospect of a steady run of price rises to compensate for declining volumes. Moreover, they said, the downward sales volume trend was accelerating - helped by the introduction of a number of bans on smoking in public places - at a time when tobacco stocks were at record highs. BAT, down 32p at £13.26, is the investment bank's preferred stock in the sector as it has relatively little exposure to the pricing problems of Europe. Imperial fell 48p to £16.22 and Gallaher dropped 26.5p to 817p.