A gloomy forecast from the Bank of England compounded fears over the future of the eurozone and further knocked the confidence of investors today.
The FTSE 100 Index pared some of its losses after the US Federal Reserve said industrial production grew at its fastest rate in three months but still closed 8 points lower at 5509.
Elsewhere, uncertainty in the eurozone continued to trouble markets, with Greece’s new prime minister Lucas Papademos facing a confidence vote next Wednesday and Italian borrowing costs remaining close to unsustainable levels.
The already bleak mood deteriorated further after the Bank said growth was unlikely to beat 1% this year and next and raised the likelihood of a contraction in the first three quarters of next year.
Economists were also digesting figures showing unemployment rose by 129,000 in the latest quarter to 2.62 million, the worst figure since 1994.
With Italy’s benchmark 10-year bond yield hovering around the 7% mark, Germany’s Dax closed in negative territory. The Cac-40 in France managed to fight back, however, and closed 0.5% higher.
The pound was weakened by the bleak Bank report, falling to 1.57 against the US dollar and 1.16 next to the euro.
Shares in FTSE retailers were shaken by the first profits warning from the sector in the run up to Christmas.
Despite strong demand for record-breaking title Call of Duty: Modern Warfare 3, Game Group expects like-for-like sales for this year will be “no better than” a 7% fall, having previously said they would drop by no more than 3%.
The warning sent Game shares down by 46% or 8.8p to 10.3p as analysts said they now expected the firm to make a loss in the current financial year.
Argos owner Home Retail Group fell 5% or 5.9p to 72.8p, Dixons Retail eased 0.2p to 11.1p and Marks & Spencer dropped 7.8p to 325p.
Elsewhere, Vodafone was 4% lower as new investors lost the right to the company’s most recent dividend payment, leaving its shares down 6.7p at 173.9p.
On a brighter note, Speedy Hire rose 7% or 1.3p to 20.3p after it reported a return to half-year underlying profits, helped by demand from customers in the utility and petrochemical sectors.
And Barratt Developments was up 6.4p at 96.1p or 7% after a trading update showed it performing in line with market expectations.
The group’s average selling prices have increased 7% to £207,000 since June as it focuses on building family homes in the more affluent south-east.
Meanwhile, a major profits warning caused shares in climate change consultancy AEA Technology to slump by 85% or 1.7p to 0.3p. The company also revealed it is in discussions with Lloyds about its banking facilities and said Andrew McCree, chief executive since 2005, has left the company.
The biggest Footsie risers were Intertek up 66p at 1952p, Kingfisher ahead 6.1p at 254.3p, Cairn Energy up 7p at 295p and Meggitt ahead 9p at 391.9p.
The biggest Footsie fallers were Essar Energy down 14.6p at 258.9p, British Sky Broadcasting off 36.5p at 716p, Icap down 17.1p at 349.9p and Vodafone off 6.7p at 173.9p.