By the close the FT-SE 100 index had been routed, with a 23.1- point gain transformed into a 30.1 fall to 3,138.2.
Interest rate-sensitive shares were the most cruelly hit, with many suffering double-figure falls.
The US move caught the market on the hop. It had come around to the view that the next movement would be downwards.
Shares had been encouraged by last week's German interest rate cut and even the latest US figures had seemed to indicate that pressure was easing for any increase in transatlantic rates.
With inflation seeming under control and retail sales showing signs of sluggishness, the market decided that the case for lower British rates was looking decidedly strong.
Consequently the US decision was a savage blow to the system. Government stocks swung from gains of half-a-point to falls of 11 2 points and if equities needed any further encouragement to run for cover it was provided by a somersault in the futures market.
Even oils, strong on the firm crude price and confident noises that it will continue to move higher, fell victims to the change of mood. British Petroleum ended 4p down at 386p and Shell 3p at 725p. Burmah Castrol fell 17p to 823p on worries that it is encountering difficulties selling its exploration operations.
Lasmo, with a pounds 219m rights issue under way, edged ahead 2p to 134p.
Lonrho, anticipating a heady response to today's Ashanti flotation, also ignored the gloom, gaining 4.5p to 154p.
Many expect the shares of one of the world's largest gold mines to be priced in the dollars 20 upper range. Monarch Resources, another gold group, also attracted a little of the glow, up 15p to 318p.
Before the rot set in Cazenove placed the 9.7 million rump of the Allied-Lyons rights issue at 320p. The cash call, to finance the takeover of the Spanish Pedro Domecq brandy and sherry group, attracted a 92.9 per cent take-up. Allied-Lyons shares closed 3p down at 581p.
In a weak stores sector Storehouse fell 11p to 218p following the signalled departure of Ann Iverson, chief executive of the Mothercare subsidiary.
The cautious trading statement from Budgens, the food retailer, cut the shares 5p to 29p, unsettling others, with Kwik Save lowered 15p to 568p.
But once again Wm Morrison remained aloof from the sector drift, gaining 2p to 126p. The company is a long-standing takeover favourite.
Reuters, in its new slimline shape, suffered profit-taking, ending at 484p, equivalent to a fall of 57p in the old heavyweight form.
British Aerospace was lowered 2.5p to 482p, anticipating more forced selling as foreign shareholdings again pierced the 29.5 per cent ceiling.
Glaxo Holdings, largely on US influences, had another uncomfortable session, falling 17p to 568p, its lowest since August.
Suggestions that Greggs, the bakery group, will fork out pounds 10m - not the pounds 50m many expect - for the 490 Bakers Oven outlets owned by Associated British Foods, lifted the shares 20p to 753p. ABF fell 2p to 596p.
Waters sank lower. In choppy trading they suffered from reports that they had underspent on repairs and the Severn Trent Worcester water pollution. Severn was lowered 18p to 517p.
Electricities were spurred by talk of takeover action but later became embroiled in the market retreat.
Rodime, the US litigation play, fell further to 11p. Since it disclosed on Friday a setback in its legal battle with US computer groups it has fallen from 30p. The shares were 49p earlier this year.
Wakebourne, the old Maddox group, gained 0.75p to 3.5p; presentations are due. Hoare Govett expects profits of pounds 2.3m this year, with pounds 3.3m next.
Metrotect, involved in pipeline protection, edged ahead 4p to 113p on contracts worth pounds 5.5m.
Watson & Philip, the convenience stores group, held at 368p. Greig Middleton is keen on the shares. It believes profits will advance pounds 2.1m to pounds 14.6m this year and reach pounds 16.6m next.
The FT-SE 100 index lost 30.1 points to 3,138.2 and the FT-SE 250 index 10.6 to 3,814. Turnover was 683.5 million shares with 30,586 bargains. The account ends on Friday with settlement on 3 May. Government stocks fell by up to pounds 11 2 .
Berisford International, fresh from its spectacular takeover of the Magnet kitchen business, could soon be on the takeover trail again. Word is that Berisford's ambitious chief Alan Bowkett is near to clinching a US acquisition. The Magnet deal was rapturously received, with Berisford shares surging from 128p to 232p. They are now at 230p, up 5p yesterday.
Rossmont, which slipped quietly onto the market at 10p in December, is attracting attention. The shares rose 1p to 15p. The group makes and supplies vandal-proof washroom facilities. It did not make a profit forecast at the time of the flotation but expected a satisfactory result. There is talk of a management injection and acquisitions with the newcomers acquiring a big stake.
A trade below the market price at City Site Estates, the Glasgow- based property group, intrigued the market. The shares held at 68p against the 62p deal. The group has been busy buying properties this year, spending pounds 18.5m. There is talk of further developments. Its portfolio is now thought to be worth more than pounds 115m, generating an income of pounds 12m.
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