The FTSE 100 closed down 134.84 points, or two per cent, at 6,627.17, having gained 1.6 per cent on Tuesday on pledges of continued monetary stimulus from major central banks, though is still up more than three per cent this month.
Still, the index is on course for a near four per cent monthly gain – its best month since January 2013 – which would mark its twelfth consecutive month of rises.
Analysts said the index, in its twelfth consecutive monthly rise, was ripe for a sell-off.
“After a very strong performance yesterday the FTSE is not able to hold those gains today and is technically very vulnerable,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages around $500 million in assets.
With no major UK company news or economic data for investors to mull over yesterday, the FTSE 100 index was a sea of red, led lower by the pharmaceutical sector, among the best performers in the rally this year.
The sector, trading on a 12-month forward price/earnings ratio of 14.8 times, is one of the most expensive of the Stoxx 600 indexes.
While officials from the Bank of Japan and the European Central Bank have reiterated that they will keep policies designed to foster growth in place, strong US economic data on Tuesday reignited concerns about the Federal Reserve’s plans.
The UK equity market fell sharply late last week after Fed Chairman Ben Bernanke said the US central bank could consider scaling back its bond-buying operations at one of its next few meetings if the U.S. economy looked set to maintain momentum.
After the FTSE 100 closed last week 110 points from its record close of 6,950.60 set in late 1999, some analysts said bouts of volatility could offer attractive entry points for investors.
“I still think it’s buy on dips, but I certainly don’t think it’s the one-way bet that people seem to think that it is,” Michael Hewson, analyst at CMC Markets, said.
Bill McNamara, analyst at Charles Stanley, cautioned that a break back below Friday’s trading low of 6,640 “would not look good” and would “suggest that a retreat to test the break above the March highs, at around 6,530, was underway”.
Stocks trading without the attraction of their latest dividend, namely Marks & Spencer and AMEC, pushed down the index 0.97 points.