Dealers fear FTSE 100 free-fall

Investors Were staring into the abyss last night after a savage plunge on the London stock market triggered fears that share prices were in free-fall.

The FTSE 100 index of Britain's top companies suffered the eighth steepest fall in its 19-year history as the market was paralysed by the mounting uncertainty over a war with Iraq.

The index slumped by 166 points, or 4.8 per cent, to close at 3,287 ­ its lowest level since July 1995. The fall was mirrored by similar sharp drops across Continental Europe. Traders expect another sell-off today, and warned the FTSE 100 could even breach the 3,000 level by the end of the week.

Confusion over the timetable for war, a rash of corporate profits warnings and fears that some UK insurers were facing insolvency conspired to drag the market down.

Andrew Clare, a financial economist at the insurance giant Legal & General, said investors could simply see no reason to buy shares. He said: "All news is bad news and even good news is bad news. Once you bust through the normal valuation bounds anything is possible."

Mike Lenhoff, the chief strategist at Brewin Dolphin stockbrokers, said the market was paralysed rather than panicking. He said: "The technical people are saying that we have to have a real capitulation that brings a bear market to an end and that would require the market to go beyond 3,000."

In London there were rumours that at least one major insurer had been forced to liquidate its equity portfolio to meet the regulator's solvency rules.

The rumours spread as the Financial Services Authority published details of a waiver of these rules. The regulator announced the waiver in January in an attempt to quell fears that insurers were caught up in a cycle of forced selling of shares because of the solvency margin rules that require them to hold enough assets to meet future liabilities. A spokesman said the FSA was monitoring the life industry and the state of the markets but added it would not provide a "running commentary" on the sector's solvency.

Casualties in the insurance sector included Royal & SunAlliance, which fell 9 per cent, Legal & General, down 8 per cent, and Friends Provident, off 11 per cent. HBOS slipped 8 per cent and Royal Bank of Scotland tumbled 9 per cent.

In a confused trading day, the market was also jolted by rumours ­ swiftly denied by the US authorities ­ that Osama bin Laden had been captured.

On top of this there were reports that a major investment bank had botched a large shares trade, causing fresh confusion in City dealing rooms.

Alex Scott, a senior analyst at Seven Investment Management, said: "It is largely to do with confidence and lack of security and ­ for those people who put store by these things ­ the fact that that it has breached key support levels."

Shares prices have fallen so far ­ 53 per cent since the peak ­ that many analysts believe the market is presenting a buying opportunity. "If you step back from the trading screen then the FTSE 100 is a screaming buy," L&G's Mr Clare said.

Analysts believe that a declaration of war against Iraq could fuel a rebound in shares as the current uncertainty evaporates ­ at least temporarily. Alex Scott, a senior analyst at Seven Investment Management, said: "It needs a trigger and it will get that, sadly, if the bombs start flying." But he said he was sceptical it would ignite another bull market.

Meanwhile, stock markets slumped across Continental Europe. In Germany a 4 per cent fall pushed the market into its worst bear market since the 1930s depression.