The FTSE 100 Index suffered a sharp reversal of fortunes today as heavy falls in the US saw the London market undo early gains to lose almost 1%.
A US government aid pledge for the banking system and reports of a major overhaul at internet giant Yahoo! spurred falls across Wall Street, with financial and technology stocks leading the way. The drop was mirrored in London where the Footsie closed 38.3 points lower at 3850.7.
The Dow Jones Industrial Average fell 86.7 points, or 1%, to 7279.0 in early trading in the wake of newspaper reports that Yahoo's new chief executive planned a company-wide reorganisation.
Banking shares also saw drops as nationalisation fears resurfaced despite a Treasury statement that "the US government stands firmly behind the banking system during this period".
In London, a raft of measures aimed at injecting confidence into the banking sector saw early rises, with financial stocks leading the way. These gains were trimmed in later trading however as news from the US weighed on sentiment.
Royal Bank of Scotland led the way with a rise of 9% or 1.9p to 21.2p after reports at the weekend said it will use results on Thursday to announce the creation of a bad bank for billions of assets deemed suitable for disposal.
The aim of the scheme is to isolate the troubled areas of the business and allow the stock market to place a value on the remaining core operations.
Other banks were higher as the Government looked set to announce details of its asset-protection scheme, which is expected to protect at least £400bn (€455.9bn) of toxic loans with a taxpayers' guarantee.
There were also attempts today to kickstart the housing market through a return to lending by Northern Rock, adding to the positive mood in the sector.
Lloyds Banking Group, which is expected to take part in the asset protection scheme, rose 0.5p to 56.8p, while Barclays added 3.5p to 98.7p.
In other corporate news, Associated British Foods lost an initial gain seen after it announced further strong trading by retail division Primark.
Analysts focused on weaker trading in AB Foods' Twinings grocery arm and the prospect that the group could post lower half-year operating profits.
Shares were down 2p at 643p.
But the statement had a positive impact on smaller rival Northern Foods, which rose 1.75p to 51p.
Elsewhere in the FTSE 250 Index, housebuilders were making gains following the Northern Rock announcement and ahead of results this week from Redrow and Barratt Developments.
Barratt added 0.5p to 71p, while Bellway rose 18p to 568p, and Persimmon lifted 11p to 296.25p. Redrow failed to benefit after shares slipped 2.5p to 122p.
The biggest Footsie risers were Royal Bank of Scotland up 1.9p at 21.2p, Legal & General up 1.8p at 36.6p, Barclays up 3.5p at 98.7p and Admiral Group up 26p at 835p.
The biggest Footsie fallers were 3i Group down 15.5p at 202.25p, Rolls-Royce down 16p at 278p, RSA Insurance Group off 5.3p at 125.4p and BAE Systems down 15p at 390p.