Good results from supermarket giant Tesco and a smattering of takeover speculation in the energy sector helped mitigate the damage from a shock rise in inflation today.
Bank of England governor Mervyn King was forced to dust off his excuses and write to Chancellor Gordon Brown to explain why inflation jumped to a much higher than expected 3.1% last month, past the 3% target figure.
In the event he blamed a sharp rise in petrol and food costs, although he added that the bank was confident inflation would fall again in the coming months.
But this did little to assuage fears of another rise in interest rates at the next meeting of the Bank's monetary policy committee in May. Analysts had already pencilled in a possible 0.25% rise. Now people are suggesting the increase could be 0.5%, and this pushed the pound above the $2 level for the first time since September 1992 ahead of the ERM crisis.
So by the close the FTSE 100 was 18.4 points lower at 6497.8, while the 250 fell 89.3 points to 11926.6. But the UK market came off its worst levels as the Dow Jones Industrial Average headed towards a new high. Wall Street was pushed higher by US inflation figures coming in better than expected, in contrast to the situation this side of the Atlantic. There were also some forecast beating results from Coca-Cola and Johnson & Johnson.
Commenting on the UK inflation figures, Simon Denham, managing director at Capital Spreads said: "The rising rate expectations have somewhat stymied the FTSE, with a stronger pound proving unhelpful to exporters and companies earning revenue in foreign currencies, such as mining, telecoms, banks and oil companies. A company making $200m last year (average rate 1.83) would have made a £109m profit; at current levels, this would drop to £100m. In short, a company would have to increase revenue by 10% just to hold firm."
Banks were lower on the rate rise worries, with Bradford & Bingley 9.75p lower at 461.5p. Northern Rock lost 20p to £11.34 after Credit Suisse cut its target price from £11.67 to £11.00, citing increasing competitive pressures in the mortgage market.
Barclays was down 8p at 748p as analysts said it would have to pay more if it was to win the battle for Dutch bank ABN Amro. A rival consortium including Royal Bank of Scotland - 16p lower at £20.55 - has said it also wants access to ABN's books, raising the prospect of a bidding war.
Rate concerns also hit property companies, with Hammerson 33p lower at £16.21 and British Land down 30p at £15.20.
Retailers were weaker on concerns about the effect of dearer borrowing on consumer spending. DSG International - formerly Dixons - fell 3.9p to 164.7p, while Argos owner Home Retail Group lost 13.5p to 441.5p.
Department store group Debenhams was a major faller. Its shares slumped 25.5p to 148.5p after issuing its third profit warning in four months and revealingd like-for-like sales had slumped by 6.9% between March 4 and April 15.
But as usual Tesco bucked the trend, adding 6p to 461.75p. Its annual profit of £2.5bn was in line with expectations, but it promised to double the amount of cash it will return to shareholders and said its property portfolio was worth around 65% more than its value in the supermarket's books.
Back on the takeover tack, International Power rose 5.25p to 419.25p on vague talk that French utility Suez may be looking for a UK acquisition. Drax, up 4.5p to 805.5p, was also mentioned as a potential French target.
But Scottish Power fell 15p to 797.5p ahead of the completion of its takeover by Spain's Iberdrola and the payment of a special 12p a share dividend. The last day of trading in Scottish Power shares is expected to be this Thursday. Evolution Securities said: "Investors who do not wish to receive Iberdrola shares as part-consideration should sell in the market ahead of this."
Elsewhere waste management group Biffa jumped 20p to 339p - a 6% increase - after Goldman Sachs added the company to its conviction buy list with a 400p target.
"In our view Biffa's share price reflects only part of the value of its growth potential, and none of the value of potential consolidation in the sector," said Goldman. "We estimate consolidation synergies in line with other sector transactions could support a valuation of up to 440p, assuming they are all paid out by a potential buyer."
Rival Shanks Group also benefited from the Goldman nod, up 14.75p to 266.5p.
Cigarette maker Gallaher slipped 1p to £11.37 ahead of its departure from the FTSE 100 at close of play today, following its takeover by Japan Tobacco. The company will be replaced in the leading index by Punch Taverns, down 3p to £12.89.
Replacing Punch in the 250 index will be computer software retailer Game Group, down 6.25p to 148.75p.
Credit information group Experian was also out of favour, down 8p to 594p. Worries about tough conditions in its key markets outweighed news of an increase in sales in the second half.
Meanwhile British Airways climbed 3.5p to 516.5p as cabin crew voted to accept a deal on pay and pensions, while publisher Reed Elsevier added 10p to 626p after it gave an upbeat presentation to shareholders at its annual meeting.
Lower down the market, Reliance Security jumped 155p to 870p after chairman Brian Kingham said he was considering making an offer for the services company.
Business solutions group TG21 jumped 0.875p to 5.625p after news that investor Peter Gyllenhammar now holds 8.87%.
Dealers reported heavy trading in Global Energy Development after positive test results from its Luna Llena 2 well in Colombia. It jumped 31p to 120p with private investors snapping up shares.
Wallpaper and fabrics group Walker Greenbank was also wanted, up 2.5p to 48.25p after a three-fold rise in full year operating profits and the purchase of 42,000 shares at 47.5p by finance director Alan Dix. Kepler Equities also raised its price target to 64p and repeated its buy recommendation.
Telecoms and broadband group Pipex Communications reported disappointing full year results, and said its strategic review would not be completed until the summer. The company was widely believed to be up for sale, but recently bidders such as Virgin Media, BSkyB and Carphone Warehouse are rumoured to have pulled out of the bidding. The company said these reports were "highly speculative" but traders said the long review process could mean no one had come up with an offer yet.
Instead, some believe Pipex could turn predator itself, with internet business Iomart mentioned as a possible target. Pipex slipped 0.5p to 12.75p while Iomart was steady at 51.5p.
Finally Surface Technology Systems halved to 7.75p after the semiconductor specialist warned full year results were likely to be significantly below expectations. It plans to implement a number of cost cutting measures, and is in talks with its parent company Sumitomo Precision Products about the future financing of the business.