Energy stocks and miners were the biggest blue chip casualties, with the two sectors particularly sensitive to the health of the global economy, and especially that of top commodities’ consumer China.
A private-sector survey that showed China’s factory sector contracted for an eighth straight month in June stoked fears that demand for resources might slow.
The US Federal Reserve’s decision to introduce only a limited expansion of monetary stimulus also weighed on equities, which have been supported in recent weeks by hopes of new central bank funding to fight off the economic slowdown and Europe's sovereign debt crisis.
The FTSE 100 index closed down 55.93 points, or one per cent, at 5,566.36 points, having added around 2.8 per cent in the previous four sessions.
“The reverberations of [Fed chairman Ben] Bernanke painting a bleaker picture of the US economy than had been anticipated and news out of China indicating that manufacturing may shrink for an eighth month did little to increase investor confidence,” said Mike Mason of Sucden Financial Private Clients.
US blue chips were down 0.7 per cent by London’s close after data showed more Americans filed for jobless benefits in the latest week than expected, and as factory activity in the US mid-Atlantic region contracted in June, adding to concerns about a softening economy.
“Weaker than anticipated US job figures cut hopes of a continued rally down to size and saw investors once again scratching their heads wondering which direction these markets will move,” Suden’s Mason added.
A switch away from risk-sensitive sectors led to a boost for stocks seen as defensive plays, notably drugmakers, household products groups and food producers.
Reckitt Benckiser was the top blue chip gainer, ahead 1.5 per cent as the stock rose after falls earlier this week linked to profit warnings in the consumer goods sector from France’s Danone and US giant Proctor & Gamble.
Liberum Capital believes Reckitt and Germany’s Henkel have the most direct overlap with P&G although it argues that P&G’s issues are mostly company specific.
Standard Life was also a big FTSE 100 riser, up 0.8 per cent supported by positive comments from JP Morgan Cazenove.
“We believe Standard Life is an undervalued, high growth and low beta stock [relative to peers],” JP Morgan said in a note, reiterating its “overweight” rating and 272p target price on the stock, offering a 20 per cent potential upside.
Among other insurers, RSA Insurance and Aviva both added 0.3 per cent.
Some fund managers seemed happy to take a contrarian view of the falling market.
“If I were to short the FTSE, I might close that out by Friday. I agree with the contrarian view, but it depends on your time horizon. Certainly there are stocks out there which if you buy now and hold for five or six years, you would do very well,” Paul Hawtin, CEO and founder of hedge fund Derwent Capital, told the CFA UK annual conference yesterday.