The day London's Stock Exchange died

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The City of London, Europe's biggest financial centre, was left paralysed for almost eight hours yesterday after the Stock Exchange's share dealing system collapsed.

The failure - the worst in its history - sparked a furious reaction from stockbrokers and bankers and triggered a reprimand from Britiain's financial services watchdog.

The failure came as an embarrassment for the London Stock Exchange at a time when it faces stiff competition from rival European markets and is planning its own flotation.

The collapse happened on the last day of the tax year, normally one of the heaviest dealing days for private investors keen to balance their share portfolios to minimise capital gains tax. It also came amid one of the most serious market sell-offs in recent years.

The problem was caused by a fault in the electronic feed that sends prices from the exchange to dealers' screens. Trading finally resumed at 3.45pm and the FTSE 100 index of blue-chip shares immediately dropped 120 points or 1.9 per cent. The Stock Exchange extended trading until 6.30pm - two hours longer than usual to help make up for the failure. The FTSE 100 closed down 47.7 at 6379.3.

The Financial Services Authority said the failure was a "serious matter that requires a prompt and thorough response". The Treasury said ministers had rejected the idea of extending the tax year.

Finance houses were critical. Mark Dampier, of Hargreaves Lansdown, a stockbroker, said: "It's been a very bad advertisement for the City of London. This is not going to make us look good on the world stage." An executive at a leading US investment bank said: "There will be a lot of people looking for explanations, especially people with tax issues. The institutions are hopping mad."

The trading director at an Anglo-French bank added: "Being the last day of the tax year, it couldn't have happened at a worse moment. Are the LSE managers going to get less shares when it floats?"

A spokesman for the Stock Exchange said it was too early to say whether there would be any compensation for dealers and investors who had lost out. She said the fault was due to a technical problem and ruled out sabotage or a computer bug. Retail brokers complained that their electronic links with market-makers - institutions who process the deals - were still not up even an hour after trade resumed.

Yesterday's systems failure came against the background of a huge sell-off of technology stocks in response to the US court decision to force the break-up of Microsoft.