The damage was restricted to the top flight, however, as investors poured money into the exchange rate-sensitive second-liners which are expected to benefit most from the recent easing in the strength of the pound.
The 125.5-point fall recorded by the FTSE 100 index of leading shares was driven by a slump in the banking sector which has driven the market's rise so far this year and become the index's most powerful force. So important have financial stocks become, that a 166.5p fall in the price of HSBC accounted for 16 points of the FTSE 100's fall by itself. Few dealers had an explanation for yesterday's dramatic decline, after a week in which economic data in the UK and US were surprisingly benign. Fears of interest rate rises in America were put on hold by figures showing consumer prices growing at their slowest rate for 11 years.
The FTSE 250 index of stocks falling just outside the market's 100 largest, rose yesterday by 8.3 points to 4698.2 as investors focused on better prospects for the country's exporters following a fall in the value of the pound and comments this week from the Bank of England suggesting further weakness is likely.
Leading stocks were given a lead by Hong Kong's Hang Seng index, which fell 400 points to 16,096.9 after three-month lending rates in the former colony rose to 9 per cent, their highest since 1995. That hit HSBC, which has extensive shareholdings in the Hong Kong market, especially hard.
Afternoon dealing was further depressed by weakness on Wall Street, which was 122.6 points lower within minutes of the opening bell in New York.
The volatility of the FTSE 100 index, which closed at 4,865.8 yesterday, is certain to open up the debate about how good a yardstick of UK investment sentiment it now is.
Its fortunes and those of the rest of the UK's more than 2,000 quoted companies have become increasingly divergent this year.
Despite an 18.1 per cent rise in the value of the FTSE 100 index since the beginning of the year, the FTSE 250 index has risen only 4.6 per cent. Yesterday's movements confirmed the belief of an increasing number of investors that any remaining value in the stock market is in the second- liners and Small Cap constituents, which were also unfazed by the turmoil in the larger stocks.
Smaller stocks, which include many manufacturing companies dependent on overseas end-markets, have benefited from the recent depreciation in the pound, which traded yesterday at DM2.93, against a high last month of DM3.07.
Some smaller companies likely to profit from the fall in the pound rallied yesterday. Paper and plastics group Bunzl jumped 11.5p, or 5.1 per cent, to 238.5p. Other FTSE 250 constituents to rise included, Williams, Rexam, BICC and Laird.
Further pressure was put on sterling this week by the Bank of England, which said in its latest quarterly Inflation Report that it expected a further 10 per cent devaluation over the next two years.