Analysts said news of the drug's suspension was a setback as it was one of the group's 10 blockbuster drugs due to be released before the year 2000, with potential peak sales of around pounds 300m. Shares in the group fell 19p to pounds 10.48.
Glaxo Wellcome, which is developing a similar class of drug - known as an anti-CD4 monoclonal antibody - for arthritis gained 6p to pounds 12.52.
Several drug companies are competing fiercely for a share of the multi- billion-dollar anti-arthritis market, where there is currently no effective treatment.
The phase-three trial results showed that 35 of the 103 patients completing the first month of treatment had reduced CD4 cell counts - indicating a weaker immune system - compared with just 10 of the larger phase-two trial.
Mark Brewer from Hoare Govett said: "This could be quite significant. SmithKline has been talking very positively about this drug. We expected it to make around pounds 20m in 2000 and pounds 300m in 2003. Anti-inflammatory and tissue repair is one of SmithKline's key research areas."
Kevin Scotcher from NatWest said that the potential side-effects from the drug were quite serious. "By making the immune system weaker, the drug creates an artificial HIV situation. This drug seems to work, but the side-effects may far outweigh the benefits."
However analysts said they were not changing their views on the stock. Mr Brewer said: "This is a good company with plenty in the pipeline if this one doesn't work."
James Culverwell, analyst at Merrill Lynch, said: "It's disappointing but pretty irrelevant for earnings. This was one of 10 potential blockbuster drugs due for release before 2000, including a follow-up close behind which might have a better profile."
A spokeswoman for SmithKline pointed out that no patients showed side- effects. She said the company was examining the possibility that the problems were due to simple manufacturing and increased dosages associated with scaling up the amount of product needed for larger-scale clinical trials.
"This drug is only on hold. We have not stopped development and we will be reviewing our manufacturing and dosing procedures."