The FTSE 100 Index was dragged downwards as fears were reignited that Portugal may be the latest EU country to need a bailout.
Heavy banking stocks were dragged into negative territory by the news, while mining stocks also suffered, which left the Footsie down 32.3 points at 6020.
The concerns came as Portuguese 10-year bond yields jumped to 7.35% – the highest since the launch of the euro in January 1999. Fears resurfaced that the Iberian country would be forced to follow in the footsteps of Greece and Ireland and turn to the European Union for bail-out funds to revive its troubled economy.
Barclays, which is heavily exposed to the Iberian peninsula, fell 1% or 3.15p to 313.3p and HSBC was down 8p to 715p. Lloyds, however, was up 0.36p to 65.8p.
In London, the Bank of England decided to hold interest rates at their historic low of 0.5%, but this had little impact on the stock exchange. Despite the decision, which was widely expected, the pound was up at 1.61 against the dollar and to 1.18 against the euro.
The single currency was dragged down by the news from Portugal. Sentiment in the US was also dampened by a raft of disappointing earnings reports from the likes of drinks giant Pepsi and consumer electronics firm Cisco.
Miners were on the back foot as commodity prices continued to drop in the wake of China’s decision earlier this week to raise interest rates. Rio Tinto was down 2% – or 110p to 4549p – while Antofagasta shed 26p to 1430p and Xstrata was off 25p at 1442.5p.
In corporate news, traders were disappointed by half-year results from drinks giant Diageo, which came in short of expectations and was the Footsie’s biggest faller. Shares fell 5% or 58p to 1195p. The market was also concerned about the impact of continuing economic weakness in Europe, where Diageo’s net sales fell 3% in the half-year.
Elsewhere, traders were shaken by a profit warning from Air France-KLM and pulled out of British Airways parent International Consolidated Airlines Group. Shares fell 3% or 8.6p to 251p.
Rolls-Royce was also in the spotlight as underlying pre-tax profits rose 4% to £955 million in 2010, despite a hit of £56 million relating to the mid-air failure of one of its Trent 900 engines on a Qantas superjumbo. The figures were better than expected but shares still retreated 5.5p to 650p.