(Update) Stock markets have pulled back, with the FTSE 100 dropping 100 points or 1.6% to 6,245, as investors on both sides of the Atlantic take profits after the surge in equities to a five-year high.
On Wall Street the Dow Jones industrial average sank 109 points to 13,900 as investors followed European markets south.
A combination of a poor eurozone consumer confidence survey, electoral uncertainty in Italy and the corruption scandal engulfing Spain's prime minister Mariano Rajoy conspired to push the FTSE Eurofirst 100 index down 1.35% or 10 points to 1,151.
Italy's FTSE MIB index plunged 520 points or 3.6% to 16,700 as investors rushed to cash in on the New Year rally, prompted by polls showing a revival in the ratings of former prime minister Silvio Berlusconi.
Meanwhile, Spain's Ibex 35 fell 247 points, or 3%, to 7,981; the Germany Dax slid 132 points, or 1.7%, to 7,700 and France's Cac 40 sank 96 points or 2.6% to 3,677.
The euro tumbled 0.7% against the dollar to $1.3549 although traders expect it to bounce back as the European Central Bank's monetary policy is tighter than the ultra-loose stance of the US Federal Reserve.
Bank shares tumbled in the market slide and after chancellor George Osborne launched the Banking Reform Bill, which will ring fence banks' high street operations and increase depositor protection. RBS (RBS.L), which reportedly faces a £500 million fine this week for Libor rate fixing, slid 3% or 10.4p to 330p.
Barclays (BARC.L) dropped 7.6p or 2.5% to 292p ff at 299.5p. Earlier the bank announced the departure of finance director Chris Lucas and general counsel Mark Harding.
But it was Aviva (AV.L), the high yielding insurer, that led the market lower, down 4.5% or 16p to 351.7p.
Randgold Resources (RRS.L) was the biggest of only five FTSE 100 risers approaching close. The index's only pure gold stock jumped 3.3% or 205p to £62.90 after its flagship mine in Mali, where French forces are helping the government fight an Islamic insurgency, broke production targets last year.
FTSE edges off high after Vodafone downgrade
09.52: Vodafone (VOD.L), a longstanding member of Citywire Top Stocks and a key holding in many investment funds, fell 3.1p or 1.8% to 170p after Citi downgraded the telecoms group to ‘neutral’ from ‘buy’.
The shares have advanced 10% so this year, with talks of a settlement with India over a long-running tax dispute augmenting the general market rally.
The stock’s fall was the main factor in the FTSE 100 dipping 14 points, 0.2%, to 6,333 after the 70 point advance on Friday. Overall, though, the mood was confident boosted by positive non-manufacturing figures overnight from China.
These followed the release on Friday of encouraging US manufacturing figures and jobs data which, while themselves unimpressive, meant the Federal Reserve would likely continue its ‘ultra-loose’ monetary policies, which reassures markets.
However, the UK construction sector remains in the mire with the Markit/CIPS Construction Purchasing Managers Index stuck at 48.7 in January, way below the 50 level that separates contraction from growth and below econmists' forecasts of a rise to 49.1.
European markets softened with the Euronext 100 half a point off at 269.7.
On currency markets the euro fell 0.3% against the dollar weighed down by another increase in Spanish unemployment, which comes as prime minister Mariano Rajoy faces calls to resign over a corruption scandal.
The pound firmed 0.24% to $1.5727 against the dollar.
Gold dipped 0.1% to $1,664.94.
Meggitt (MGGT.L), whose US subsidiary Securaplane Technologies makes the charger for the batteries at the centre of the grounding of Boeing 787 Dreamliners, fell 8p of 1.9% to 433p after US officials said they were making progress in their investigation.
Shares in BAE Systems (BAES.L) were unmoved by a Sunday Times report that the Serious Fraud Office had investigated chief executive Sir Dick Evans' ownership of two Mayfair flats and whether they had been bought for him as a 'kickback' from a big arms deal with Saudi Arabia.