London share prices plunged almost 100 points in pre-market trading, following Friday's 96-point fall on Wall Street, triggered by an unexpected quarter-point rise in US interest rates - the first in almost five years.
However, UK stocks rallied sharply after it became clear that Wall Street was poised to recover from moderate early falls. By the close, the Dow Jones Industrial Average had recouped more than a third of Friday's decline, ending up 34.90 at 3,906.32.
The FT-SE 100 index of leading UK shares ended 56.3 points down at 3,419.1, wiping more than pounds 14bn from share values, though much of the decline was due to dealers marking down prices. At the day's worst levels, share prices plunged by about pounds 22bn. Sharper declines occurred in Paris and Frankfurt, but earlier closes than London prevented them absorbing the good news on Wall Street.
In Frankfurt, the 30-share DAX index retreated 58.85 points to 2,079.40, while on the Paris bourse, the CAC-40 index shed 42.11 points to 2,287.06.
The worst-performing markets were in the Far East: Hong Kong tumbled 6.11 per cent and Singapore shed almost 2 per cent of share values. Analysts said it could spell the end of the prolonged bull market in the region as foreign investors withdrew to safer havens such as Continental Europe and the UK.
Although Tokyo dropped by 287.03, leaving the Nikkei-225 at 20,014.40, the Japanese market is seen by some analysts as a long- term buying opportunity, in contrast to other Far Eastern markets.
Despite the rise in US short-term rates, most analysts predict that Britain and Continental Europe are still on course for further rate cuts that would underpin European stock markets. Further modest rate increases are forecast in the US but analysts expect Wall Street to be driven by earnings growth instead of relying on the flood of money out of low-paying bank accounts.
Michael Hughes, chief economist at BZW, said: 'A US rate rise of this order is insufficient to stem the flow of funds away from banks and into mutual funds. Where there was a genuine speculation, such as the Hong Kong economic region, the bubble has burst. When the money comes out, Europe and the UK stand to gain.'
Carolyn Moses, director of research at Lehman Brothers, said: 'What we've been through is a hiccup. For those people who are not yet in the market, today is a good day to buy.'
But there was lingering concern that the Bundesbank could delay a reduction - or even raise rates - if the mark lost too much ground against the dollar.
Yesterday, the dollar rose another 1.23 pfennigs to DM1.7628.
The influential German economist, Norbert Walter, chief economist of Deutsche Bank, warned that the Bundesbank could refrain from cutting rates - or even raise them temporarily - until after regional elections in the middle of March.
He said the central bank was worried about the mark and was, in any case, unlikely to ease as long as money supply growth remained high. 'I would not fully exclude the possibility that the Bundesbank will increase short-term rates,' Mr Walter said.
Aside from worries over the timing of German rate cuts, analysts predicted that the bull market would persist in the UK, the US and to some extent Continental Europe. In Britain, more than in Europe, dealers predict that the market will be supported by improved earnings growth.
Robert Buckland, of NatWest Markets, said the forthcoming company reporting season would feature 'fairly severe profit rebounds'. But he said some investors expressed concern about Continental markets where the prospect of profit growth is much farther away and where interest rate cuts are slow in coming.
Sounding a more pessimistic note, Peter Warburton, of Flemings Securities, said: 'This told us something about life ahead. There is a day of reckoning ahead and this could be the beginning of the end of the bull market.'
(Photograph and graphs omitted)