Power U-turn sends market reeling

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Shares, bonds and currencies were plunged into turmoil last night as dealers braced themselves against the continuing chaos in the foreign exchange markets and a massive U-turn by the electricity industry regulator, Professor Stephen Littlechild, to crackdown on electricity prices. More than £3.5bn was said to have been wiped off the value of power shares.

The FT-SE 100 index plumbed its lowest level for six weeks, closing below 3,000, down 24.9 points at 2,977 and the Dow Jones index opened below 4,000 and had fallen 43 points to 3954 at noon.

Five key currencies - the dollar, French franc, sterling, Italian lira and Spanish peseta - reached more new lows against the mark yesterday. The US dollar once again broke past its previous record low against the yen, heading below Yen91. But there was no sign of official intervention on a big scale.

The pound closed at DM2.25, down 5 pfennigs, and nearly unchanged against the dollar at $1.64. Against the mark the dollar closed at DM1.37, 3 pfennigs lower. Gilts fell sharply.

Second line stocks were hit even harder than the market leaders thanks to the FT-SE 250's exposure to the electricity sector. The index lost 67 points to close at 3328.

There was outrage among investors after it emerged that the Treasury knew about Offer's proposed tightening of the regulatory screw before the launch this week of the sale of shares in National Power and Powergen, the generating companies. Electricity shares collapsed yesterday as the market reassesed the regulatory risk of holding utilities. South West, Yorkshire and East Midlands all lost more than a fifth of their value.

But the Treasury last night denied responsibility for the debacle which virtually wiped out the profits of a million small investors and left hundreds of City institutions nursing losses on the Government's shares in National Power and PowerGen, snapped up less than a week ago.

A brief statement from Kleinwort Benson and BZW, the joint co-ordinators for the £4bn power sale said the Treasury knew the regulator Prof Littlechild was planning a further statement on prices charged by the regional electricity companies. But the regulator is independent and the Treasury and its advisers did not know the contents or the timing.

Meanwhile, the crisis continued to hit currencies. "The markets are ahead ten-nil," said Robin Marshall, chief economist at Chase Manhattan. He said plans for European monetary union had been damaged by the lack of any official response to the crisis.

Gnter Rexrodt, the German economics minister, called on EU members to make greater efforts to meet the economic convergence criteria required for monetary union. Most economists thought the pressure on sterling would not automatically make Kenneth Clarke, the Chancellor, and Eddie George, Bank of England governor, opt for an interest rate rise when today. Kevin Darlington, UK economist at Hoare Govett, said: "The pound has joined their worry-list but there is unlikely to be a knee-jerk reaction."

Business leaders expressed their fears about the impact of massive exchange rate turbulence. Jaguar's return to profit risks being thrown off course, Nick Scheele, chairman and chief executive of the Ford subsidiary, said yesterday.

In the US Treasury Undersecretary Lawrence Summers said a strong dollar was in the national interest and the Treasury could still defend the dollar if it chose to. Currency analysts said the growing crisis could now only be averted by co-ordinated changes in interest rate policy. The dollar has been under pressure since Federal Reserve chairman Alan Greenspan suggested US interest rates would not have to rise much further, and markets are now looking for a reversal of this hint.