At one point the FT-SE 100 index was 72 points lower but it regained some of its poise towards the end of the session, closing 47.9 points off at 3,710.3. The day's loss means the index is now only 21 points, less than 1 per cent, higher than at the beginning of the year.
Tumbling share prices took dealers by surprise. Mike Butler, a trader at Panmure Gordon, said: "I can't remember having seen an interest rate reduction and the market down 60 points. It's all about America, of course, but I wouldn't be surprised to see the market better in a week's time."
Others took the view, however, that the strengthening of the US economy had given European banks less scope for rate cuts. There was speculation that had Kenneth Clarke left the quarter-point cut until Monday he would not have felt able to reduce rates.
Fears that yesterday's cut may be the last for some time pushed the 10- year gilt lower, driving the yield 21 basis points higher to 8.06 per cent, the highest for almost five months.
Wall Street was briefly sent reeling on news of a giant leap in job numbers in the US economy in February, which dashed hopes of a further cut in interest rates by the Federal Reserve.
The statistics initially had a devastating effect on the Dow Jones industrial average, which plunged by as much as 116 points in the first half hour of yesterday's trading. The index later stabilised somewhat and was off by around 70 points at the lunch hour.
The biggest beating was taken by the bond market, however, with the Treasury 30-year long bond down by 3 points in early trading. Even by noon, the 30-year bonds were still off by a sobering 2.5 points while the yield has climbed steeply from 6.47 per cent to 6.71 per cent.
Sparking it all was the report from the US Labor Department showing a net rise of 705,000 non-farm jobs in February, far exceeding most analysts' expectations. It was the biggest single monthly gain in 13 years. The overall unemployment rate fell to 5.5 per cent.
The report in effect torpedoed the notion popular with many analysts over recent weeks that the expansion in the US economy had run its course and that a period of recession might even have been in prospect. It was that scenario that had kept hopes alive that the Federal Reserve might have made one more cut in interest rates at its next policy meeting on 26 March.
By contrast, an unemployment rate of 5.5 per cent is likely now to stir renewed fears of a return of inflationary pressures in the US economy as employers begin to face difficulties in maintaining workforce numbers. Against that kind of background any monetary easing is seen as most unlikely.
The market jolt raised some fears that the Dow Jones index, which has set 16 record highs this year already, might at last be due for a correction or even a disastrous reverse reminiscent of the collapse of 1987.
Comment, page 21
Market Report, page 22