Footsie dives after Asia markets drop

London's leading share index slipped two per cent by midday today, led by banks and commodity stocks, as persistent fears of a US recession pulled global equity markets lower.

At 11.46am, the FTSE 100 was down 122.7 points at 5,746.3. London's blue-chip index is down 11 per cent so far this month, on track for its biggest monthly percentage loss since September 2002.

"All seems to be rattled again. Perhaps it's unsurprising, given the seemingly baseless rally towards the end of last week," said Tim Hughes, head of sales trading at IG Index.

"We are not going to know ... for a few weeks, for a few months, whether recession is the next problem that we are going to be dealing with, or if the ... (US) fiscal stimulus package and aggressive interest rate slashing are going to be effective."

European shares were also sharply lower by mid-session. In Asia, Japan's Nikkei average dropped nearly 4 per cent on worries that the US economy was already dragging Japan into recession.

Banks, which have borne the brunt of the turmoil in the global credit market, were again battered, shaving 23 points off the index.

Barclays, Royal Bank of Scotland, HSBC, HBOS, Lloyds TSB and Standard Chartered lost between 1.7 and 3.4 percent.

Bank of England policymaker David Blanchflower said the central bank needed to stop worrying about inflation and cut interest rates to prevent a sharp slowdown in growth.

A Reuters survey showed last week that all 58 economists being polled expected the Bank of England to cut interest rates by 25 basis points to 5.25 per cent next month, following its first cut for over two years in December.

"Despite the aggressive 75 basis points out-of-meeting rate cut by the US Federal Reserve and continued jitters in financial markets, we would caution against counting on an aggressive Bank of England rate cut," Morgan Stanley said in a note.

"Unless it becomes clearer that a very sharp deterioration in the UK economy is likely, then the three or four rate cuts priced in by the market likely overstates the scale of further monetary easing from the Bank of England."

Commodity shares also suffered on concerns that slowing growth may restrict demand for raw materials. BP shed 3.4 per cent, and Royal Dutch Shell dropped 3.2 per cent.

In the mining sector, BHP Billiton, Rio Tinto, Anglo American, Kazakhmys, Lonmin and Vedanta Resources were all down between 2.6 and 6 per cent.

Xstrata gave up early gains to show a fall of 0.1 per cent, still faring better than its sector, thanks to takeover expectations.

The Anglo-Swiss miner also announced a 28 per cent increase in the total estimated mineral resource at the Collahuasi copper mine in Chile.

Housebuilders fell, with Taylor Wimpey down 2.5 per cent, and both Persimmon and Wolseley shedding 4 per cent.