A string of profit warnings from safe-haven British companies sparked fears yesterday that the deadly tentacles of the sub-prime crisis were starting to spread.

A cut in interest rates by the Bank of England to 5.25 per cent failed to overcome investor gloom as a volley of surprise profit and sales warnings from bellwether British companies, such as GlaxoSmithKline, Yell and BT, fuelled fears of a deepening economic crisis. One-off factors as well as a general souring of investor sentiment led to a sell-off across the board.

Jeremy Tigue, the head of global equities for F&C and manager of the Foreign & Colonial Investment Trust, said: “There is real concern that the problems are starting to move from the financial sector to the whole market and that there's nowhere to hide.

“There seems to be a race between the effects of the credit crunch and central banks who are cutting interest rates. People think that the credit crunch is going to win and that interest rates are not going to come down quickly enough. People are nervous and it is going to stay like this.”

Yell Group led the gloom. The owner of the Yellow Pages was the FTSE 100's biggest faller after it became the first media company to say that it was suffering from a weakening UK economy. Nearly £5billion was wiped from the value of GlaxoSmithKline after Europe's biggest drugmaker said that its 2008 earnings would fall because of tougher generic competition and sliding sales of Avandia, its diabetes drug.

BT closed down 10 per cent after the group said that its quarterly profits had fallen, hit by the declining profitability of its broadband service and by worries over whether its multibillion-pound investment in its 21st Century Network would pay off.

London's leading shares tumbled 2.6percent in harsh market conditions, with the FTSE 100 index losing 151.3 points to end the day at 5,724.1. The UK benchmark index has lost 5percent so far this week and is down 11 per cent for the year.

Howard Wheeldon, senior strategist with the spread better BGC Partners, said: “We're living through a period of great fear, and fear breeds on fear. Until we get to the bottom of the underlying problem of clearing the decks of these sub-prime-related problems and the fiscal measures start to show that we can get through this, it's going to be very volatile. There's no light at the end of the tunnel yet.”

Rolls-Royce lost 10.2 per cent as investors were disappointed that the British engine maker raised its dividend by only a third. British Land fell 1.3 per cent after reporting a 17 per cent fall in the net asset value of its portfolio, as commercial property valuations continued to fall.

Yell's bearish tone surprised the City because the company is regarded by many analysts as an attractive defensive play in the UK media sector, owing to its relative resilience during downturns. Yellow Pages advertising is often the last item to be cut when budgets come under pressure.

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