Closing Market: US economic decline adds to investors’ woes

UK shares were dragged further down in afternoon trade after shares in the US sank on worse than expected figures on the economy and the news that the government will increase its stake in Citigroup to 36%.

Sharp falls in consumer spending, investment and exports stateside saw the economy shrink by 6.2% in the last three months of the year. The fall in GDP, which was a revised down figure from -3.8%, was even worse than had been expected.

For the year as a whole, the world’s largest economy grew by 1.1%.

The GDP figure, coupled with bad corporate news, combined to see the Dow fall as low as 7,034, rising slightly as UK markets closed to sit 1.32% down at 7,087. The S&P 500 was 1.54% lower at 741.

The long-anticipated Citigroup rescue deal will see the government take a 36% stake in the bank in return for drastic boardroom changes and the conversion of up to $25 billion in preferred shares held by the US government into common stock.

The pain was felt across the Atlantic, with the FTSE 100 closing down 2.18% at 3,830.

The blue chip index was down all day, as banks dragged.

Lloyds today confirmed a loss of £10.8 billion at HBOS in 2008, while it said the former Lloyds TSB's profits were down 80% year on year. It also warned that the group would make a loss before writedowns in 2009, pushing the stock even lower.

Lloyds subsequently topped the fallers, down 22.27% or 16.7p, at 58.3p, with the company's failure to as yet agree a deal with the Treasury over the Asset Protection Scheme also affecting the stock.

Peers had also extended losses amid a round of broker updates, with Royal Bank of Scotland 20% down and Barclays 17.35% weaker.