Banks hit FTSE as toxic debt worries grow

London equities fell on Tuesday over fresh fears about the extent of toxic assets in the financial sector.

The FTSE 100 fell 56 points to 3,936.68, a loss of 1.4 per cent with much of the overall loss accounted for by banks, after reports the International Monetary Fund was poised to predict toxic debts held by institutions could reach $4,000bn, up from earlier forecasts of $2,400bn.

Banks and insurers were sharply lower across the board. Lloyds Banking Group fell 9.4 per cent to 72.2p, while Legal & General was 10 per cent weaker at 46.1p and Royal Bank of Scotland fell 6.7 per cent to 27.8p. Standard Chartered was 5.8 per cent lower at 904½p.

Fund managers were also hit by the souring sentiment. Schroders lost 4.7 per cent to 683p and Man Group was 5.7 per cent weaker at 230½p.

"After a strong Spring bounce we've had a timely reminder that there is still plenty to worry about," said David Morrison, market strategist at GFT.

"The IMF forecast turns attention to commercial loans and credit card defaults - far more prosaic than the exotic debt instruments we've been used to, but capable of sharply reversing recent bullish sentiment."

News that manufacturing output suffered its sharpest decline in at least 40 years ichimed with the renewed jitters on the market. Production fell by a seasonally adjusted 6.5 per cent in the three months to the end of February compared to the previous three months, the Office of National Statistics reported. That is the biggest drop since monthly data on manufacturing output began in 1968.

But there was support for defence companies on hopes that changes to the Pentagon's spending priorities would generate new revenue lines in the sector.

BAE Systems was the FTSE 100's biggest single gainer, up 5 per cent at 344.8p. Cobham, which makes components and subsystems for defence projects, was 3 per cent higher at 181.7p. Rolls-Royce, the aero-engine maker, was 1.3 per cent better off at 329.8p. Qinetiq, the mid-cap defence R&D specialist, was 2.2 per cent firmer at 130½p.

Miners added to the overall pressure, on returning fears about the prospects for a recovery in the economic growth behind demand for the base metals produced by the sector. Vedanta Resources was one of the biggest fallers, down 4.7 per cent to 734p.

Mid-cap internet gambling stocks moved sharply higher as expectations for consolidation in the sector intensified after Partygaming said it had reached a deal with US authorities that will see it avoid prosecution.

Partgygaming rose 7.8 per cent to 235.8p while potential target 888 Holdings was 10.6 per cent higher at 99.3p. SportingBet rose rose 11.5 per cent to 46.3p.

Overnight in New York, banking stocks were back under pressure, even before news of the IMF forecast broke, after more bearish analysis on the sector. But a late recovery took leading indices off their intraday lows and the S&P 500 closed 0.8 per cent lower at 835.48, with the Dow Jones Industrial Average down 0.5 per cent to 7,975.85.

A late bout of profit taking took Asian indices off their five-day rally. Japan's Nikkei 225 average was 0.3 per cent lower at 8,832.85 as European indices opened.

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