Johnny de la Hey, an analyst at the Societe Generale Strauss Turnbull investment house, said: 'It looks as though a banking war could be breaking out'.
Midland, a subsidiary of HSBC, is reducing its rate on loans above pounds 5,000 to 15.9 per cent. The new rate runs until the end of September but could be extended.
Until the Midland move filtered into the stock market, bank shares had put on a firm display. But at the close, Abbey National was down 9p at 395p; Barclays 6p at 548p; Lloyds 14p at 556p and National Westminster 16p at 458p.
The Midland cut could overshadow the banking season, due to be kicked off next week by Lloyds. Profits, covering the first six months of the year, are forecast at pounds 672m against pounds 498m.
The FT-SE 100 index closed 14.1 points lower at 3,077.2, its first reverse under the rolling settlement system. It was dragged down by a weak New York performance after the Federal Reserve chairman, Alan Greenspan, raised the spectre of higher US inflation and interest rates.
The cabinet reshuffle, not seen as heralding any big policy shift, and the latest domestic statistics were largely ignored as the Greenspan pronouncements were given pride of place.
The supporting FT-SE 250 index, however, retained the bullish trend, up 12.6 to 3,587.
BT was marked down as confusion reigned about its prospects in Europe, with some seeing the latest directive from the EU as reducing the likelihood of a liberalisation of telecommunications. The shares fell 7.5p to 387p with the partly paid units down 7p at 268p.
British Petroleum failed to hold an early gain, prompted by an investment presentation. The shares, at one time at 411p, ended 2p lower at 405.5p. Shell rose 6.5p to 722p, despite indications the striking Nigerian oil workers were putting pressure on the group in a bid to win its support. Shell is thought to handle about half Nigeria's oil exports.
VSEL, the shipbuilder, continued to dance on what is likely to be Swan Hunter's grave. The shares rose 34p to 908p on the Government's decision to award what would have been a yard-saving order for Swan to Rosyth. The sinking of Swan is seen as removing a VSEL competitor.
Cadbury Schweppes' failure to win a seat in the boardoom of Dr Pepper/Seven-Up, the US soft drink group where it has a 25.9 per cent shareholding, drew attention to United Biscuits, up 10p at 316p.
The market theory is that the thwarting of Cadbury's US ambitions could leave it hungry for UB. It is widely suspected that last year Cadbury was just the thickness of a flake away from mounting a hostile bid. Cadbury fell 3.5p to 444p.
Argyll, the supermarket group, put on 8p to 259p as profit forecasts were lifted; the hope of a higher bid for William Low lifted its shares 5p to 261p.
Insurances remained in the limelight, with Commercial Union rights issue fears mingling with renewed talk of corporate action from Union des Assurance de Paris. The French insurer has made no secret of its desire to expand in Britain but some suspect its target is an unquoted company; others suggest a minority stake in a quoted insurer is on the cards.
CU, buying Groupe Victoire of France, has said a cash call features in its calculations.
Amec, the construction group, gained 8p to 111p on Goldman Sachs support, but Mirror Group Newspapers dipped 5.5p to 138.5p as Smith New Court made negative comments.
Kingfisher fell 13p to 502p, still perplexed about the expected arrival today of Home Depot, the US do-it-yourself group. The market is becoming increasingly worried by what it sees as Kingfisher's vulnerability to a Home Depot assault.
Electricities were firm as NatWest Securities said the shares seemed set to perform well when the next regulatory review is released.
Porvair, a maker of synthetic materials, rose 21p to 301p as Credit Lyonnais Laing waxed enthusiastic about a new pressure casting system that has attracted its first ( pounds 750,000) order. The shares gained 21p to 301p. CLL's Ian Jermin expects profits this year of pounds 3.2m with pounds 4m next.
Ramco, the oil group, shaded 2p to 139p as Greig Middleton placed 910,000 shares at 135p to reduce borrowings.
Carnell slipped quietly on to the market on Monday through the stockbroker Fiske & Co. The shares were sold at 18p; they are now 31p. Behind the group, a direct-selling publisher that test- markets books, is John Gommes. He created Chartsearch, selling to Nigel Wray, who merged it with the Burford property group. Mr Wray has 5.32 per cent of Carnell.
The motor dealer Evans Halshaw, fresh from capturing the Davenport Vernon garage group, should produce strong interim figures next month accompanied by cheerful noises about new registration sales. The Davenport share offer was accepted for 93.72 per cent; most of the pounds 29m rights issue has therefore been pumped into the business. The shares rose 3p to 459p.
The FT-SE 100 index fell 14.1 points to 3,077.2, but the supporting FT-SE 250 index rose 12.6 to 3,587. Turnover was 679.7 million shares with 25,262 bargains recorded. Government stocks weakened on the testimony by Alan Greenspan.
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