The FTSE 100 has fallen further as disappointing economic data combined with mounting tensions in the Ukraine conspired to send the index towards its biggest one-day loss in a month.
The UK blue-chip index fell 80 points, or 1.2%, to 6,601 points, extending losses made in early trading prompted by reports that Russian troops were amassing on the border with the Ukraine.
Markets were dealt a further blow with news that manufacturing output rose just 0.3% in June, according to the Office for National Statistics. While June's figure was an improvement on May's 1.3% drop, investors had been expecting a 0.6% rise.
'The absence of a bigger rebound from May's 1.3% monthly decline appears to have raised further questions about whether the UK manufacturing sector could be headed to a more moderate growth path,' said Victoria Clarke, economist at Investec. 'If these trends continue, it could well be left to the services sector to do much of the heavy lifting in driving recovery momentum through the rest of the year.'
She added that while purchasing managers' index figures suggested manufacturing was 'firmly in expansionary territory' in July, the 55.4 figure was nevertheless 'the softest reading in a year'. Any reading above 50 indicates expansion. The pound fell to $1.6841 on the news.
News that Italy had fallen into recession, with a 0.2% contraction in gross domestic product in the second quarter, following a 0.1% drop in the first, added to bearish sentiment.
'It has been difficult to distinguish between peripheral Europe for some time, but what we have seen this year is the outperformance of countries that have maintained structural reforms and improved their competitiveness like Spain and Ireland,' said Azad Zangana, European economist at Schroders.
'Meanwhile countries that have been slow and unwilling to embrace reforms such as Italy and France, have been a drag on the wider eurozone economy.'
To add to the market woes, Germany reported factory orders had slid 3.2% in June from May, while investors had been expecting a 1% rise.
Pharmaceutical stocks extended losses, with Shire (SHP) down 6.2% at £45.73 and AstraZeneca (AZN) down 5% at £41.30. The falls came as three US senators called on president Barack Obama to eliminate tax breaks for companies that shift their headquarters overseas.
Shire has agreed to a takeover by US rival AbbVie (ABBV.K), which plans to relocate the combined company to the UK, where taxes are lower. AstraZeneca meanwhile fought off a bid from Pfizer (PFE.N), which was planning a similar move, although the US company could return with another bid later this month.
Hargreaves Lansdown (HRGV) jumped 3.6% to £10.42, after Numis analyst James Hamilton upgraded the stock from 'hold' to 'buy' following share price weakness. The shares are down 23% over the year so far.
FTSE falls as Russian troops gather on Ukraine border
9:16 The FTSE 100 has dropped amid fears over escalating geopolitical tension, as Russian troops were reported to be amassing near the Ukraine border.
The UK blue-chip index fell 35 points, or 0.5%, to 6,646 points as Russian news agencies also reported that president Vladimir Putin had ordered his government to prepare retaliatory measures against the latest European Union and US sanctions.
‘After the European close [yesterday], reports of a Russian military build-up on the Ukrainian border have spooked markets globally,’ said Jonathan Sudaria, dealer at Capital Spreads.
‘Adding to the sour mood were comments from Putin himself that Russia should retaliate against the sanctions recently imposed on them last night.
‘The natural conclusion that markets are drawing is a huge escalation in the Ukrainian crisis and the usual excuse of normal military exercises won’t wash this time, so expect markets to be highly on edge whilst the West tries to decipher Putin’s true intentions.'
Most sectors were down in a broad-based slump of the index, with health care the worst hit.Shire (SHP) was the biggest faller, dropping 3.2% to £47.18, Smith & Nephew (SN) dipped 2% to £47.19 while AstraZeneca (AZN) traded 1.9% lower at £42.63.
Legal & General (LGEN) rose 0.8% to 233.6p as the insurer reported a 7% jump in pre-tax profits over the first half of the year, helped by demand for its retirement products.