City suffers £16bn blow to shares

THE City suffered heavy stock market losses today, hit by a damaging cocktail of worries about higher US interest rates, spiralling oil prices and escalating violence in Iraq.

At its low-point for the day, the FTSE 100 index of leading shares fell 78 points to 4363, extending last week's losses which saw it shed 1.3%. The fall wiped almost a further £16bn off the value of Britain's biggest companies but the index later recovered to end the day down 38.8 points at 4403.

Continental bourses suffered similar falls while, overnight, Tokyo's Nikkei 225 Average dived 344 points to 10,505. At one stage, it dipped below 10,500 for the first time in three months. On Wall Street, the Dow was expected to plunge 120 points at the opening bell.

'Confidence has just been smashed,' said David Buik at City bookie Cantor Index, blaming 'interest rate hysteria' for much of the deterioration in sentiment. 'I don't think it has anything to do with corporate earnings, which are as good as can be expected,' he said.

Most economists expect the Federal Reserve to lift US rates from a 46-year low of 1% on 30 June. Also fraying nerves were concerns that soaring oil prices will stifle economic growth. US crude prices today struck a record high of $41.84 a barrel.

Low US gasoline stocks ahead of peak summer demand, a surge in global consumption and worries that instability in the Middle East may disrupt supplies from the region have driven crude prices up nearly 30% so far this year.

In London, Brent crude jumped 39 cents to $38.25 a barrel. Opec president Purnomo Yusgiantoro said the cartel was unhappy with the increase. 'High oil prices can cause recession,' he said.

Opec ministers are expected next week to discuss a proposal from Saudi Arabia to raise official output limits by at least 1.5m barrels a day to cool prices.

Investors were also rattled by news of a giant suicide car bomb in Baghdad which killed the head of Iraq's US-appointed Governing Council.

Today's stock market losses came as one analyst warned that the worst crash for 17 years could be days away.

Albert Sharp, at Dresdner Kleinwort Wasserstein, said the similarity between recent US share price movements and the weeks before the crash of 1987 was 'uncanny'. He said the recent rally would unravel, taking equity markets to 'new bear-market lows'.

Tom Hougaard at City Index said: 'The truth is that there is no single reason why stocks are for sale. It is rather a question of a moment of realisation for investors, many of whom are beginning to wonder if stocks will go positive at all this year.'

Others were more sanguine. Hardeep Tamana, a director of The Fyshe Group, said: 'Our view is that a market correction was due to happen at some point because of the turn in the US rate cycle. But we remain confident about the Footsie and believe that it will stabilise.'

The dollar fell almost a cent to 1.7675 against sterling.