On Wall Street, a wave of selling pushed the Dow Jones index down more than 60 points as Americans worried about falling profits from a stumbling recovery. UK investors were reacting to a growing sense of crisis within the Conservative Party - and the Wall Street fall.
The Footsie was off 67.8 points by mid-afternoon. Although the index recovered, it still closed 50.2 points down at 3460.1.
Share prices on Wall Street fell sharply yesterday morning in heavy trading, as what began as investor jitters over the prospects for technology stocks widened into an across-the-board sell-off. For the second day running New York Stock Exchange limits on program trading came into effect, triggered by a near 65-point drop in the Dow Jones Industrial Average shortly after the opening bell.
By lunchtime the market had recovered some ground, but the Dow was still down by 37.21 points at 4689.01, and the Nasdaq composite index, which was 20 points down in early trading, stood at 970.90 for a loss of 13.84 points.
Market strategists played down the significance of yesterday's movement. "It's this absurd situation, with the UK marked down ahead of an expected plunge on Wall Street. Then after the close the Street bounces back" one said. But he warned that any recovery later in the week would depend on how the markets reacted to key speeches from the Chancellor and Prime Minister in Blackpool.
Another strategist described the fall as an over-reaction, blaming a dearth of the takeover news that has buoyed the market over the summer. But he said bids and a wave of consolidation in financial services had distracted from poor market fundamentals - recent weakness in the gilt market following the uncovered auction, poorer than expected economic figures and a worsening outlook for corporate earnings.
The consensus from BZW's sector analysts now points to earnings growth this year of 11 per cent, compared with the 15 per cent expected recently. Steve Wright, the firm's UK equity analyst, believed that figure could retreat even further to maybe 8 per cent.
Analysts said markets might normally be expected to bounce back today but forecast continued uncertainty ahead of key speeches tomorrow and Friday from Kenneth Clarke and John Major, as well as inflation figures expected to edge higher.
The recent weakness of the New York market again focused on bearish sentiment in the highly rated technology sector. Poor results from Motorola, the computer chip manufacturer, and a gloomy report from the Semiconductor Industry Association sparked fears of a sell-off in the sector that has largely driven the rise in Wall Street this year.
Many analysts view the correction in the technology sector as overdue, and also point out that the broader market enjoyed its fastest run-up since 1987 during the first three quarters of 1995. They have been expressing caution since early summer, but have been drowned out by the hype over the launch of Microsoft's Windows 95 operating system, and the market frenzy over offerings such asNetscape. Its share price more than doubled on its first day of trading in August. Hi-tech stocks did not fare so well in September, but the past few days have seen the first signs of panic selling by small investors, who have so far appeared blind to the risks in the market.
Investors in the US are also becoming increasingly exercised about third- quarter earnings figures due in November, which analysts believe will disappoint compared with the impressive first and second quarter numbers.
This week's sell-off was triggered in part by Friday's announcement from Novell that its fourth-quarter earnings would fall well short of analysts' expectations, as a result of weak sales in its applications software products, which include WordPerfect. Novell said weak third quarter sales were going to get worse in the current quarter. This announcement was made after close of trading on Friday, but was picked up on Monday morning as an excuse to start offloading technology stocks.