The FTSE retreated from Wednesday's record high, closing down 101.1 points at 6,206.5, amid jitters about the outlook for both the domestic and the international economy.
The Dow Jones index fell for the second successive day with investors fearful of a rise in US interest rates, and the CBI warned that further shocks to the world economy could push the UK into recession. The CBI yesterday cut its 1999 growth forecast to 0.5 per cent, substantially below the Government's 1 to 1.5 per cent forecast.
Kate Barker, CBI chief economic adviser, said: "Although we expect the economy to hit a standstill in the first half of 1999, this should be short-lived."
As long as the Bank of England keeps cutting interest rates and there are no more nasty upsets in the international economy, growth in the UK will bounce back towards the end of the year, the CBI said.
Ms Barker, who urged the Bank of England to cut interest rates by a further 0.5 percentage points over the next few months, predicted growth should average 1.8 per cent by 2000.
The CBI's latest monthly industrial trends survey, released alongside the economic forecasts yesterday, found fresh evidence that the UK manufacturing sector could be on the road to recovery. Manufacturers' order books are showing signs of improvement, according to the CBI, and output optimism is continuing to pick up.
Around 45 per cent of companies said order books were below normal in February, compared to 10 per cent which said they were above normal. This gives a net balance of minus 35 per cent, compared with minus 43 per cent in January and minus 38 per cent in December.
Ken Wattret at Paribas said: "We may be past the bottom. The headline increase in orders was quite encouraging."
However, conditions are likely to remain tough in manufacturing for many months, the CBI warned. Economists said it would take several months for improvements in confidence to be translated into increases in manufacturing output.
Sudhir Junankar, CBI associate director of economic analysis, said: "Manufacturers expect the recession in their sector to continue in the next few months. But the downturn may not be as sharp as they once feared."