Fears that Northern Rock was on the brink of issuing a profit warning sent its shares tumbling 33p to a 4½-year low of 639p in heavy volume. It emerged last night that the Newcastle bank had asked the Bank of England for an unlimited line of emergency credit after being unable to raise funding in the money markets.

Its fellow mortgage lender Alliance & Leicester came off 26p to 937½p and housebuilders were also hit as RICS data showed that house prices in August fell for the first time in more than two years, while the number of new buyers dropped at the fastest rate since August 2004, indicating that new mortgage applicants may be drying up. The refusal by Mervyn King, Governor of the Bank of England, to bail out banks and mortgage lenders also weighed on their share prices.

Northern, at one stage down 7 per cent or 50½p is seen as particularly vulnerable since it must refinance its loans on the asset-backed debt market which has frozen in the credit crisis. There was talk that Dave Jones, the finance director, had cancelled a meeting with Merrill Lynch, the company’s broker, next week ahead of a trading statement due on October 1. The bank recently raised the rate it offered on fixed deposits to 7.29 per cent to attract funds.

The housebuilders found investors chipping away at their foundations. Barratt Developments fell 16p to 870½p on talk of big short positions taken by a number of hedge funds. Persimmon slipped 14p to £10.88 while in the mid caps, Berkeley Group fell 95p, or 6 per cent, to £14.50, although one hedge fund is said to have bought at £14.60 to close its short position.

British Land lost 23p to £12.00 after Morgan Stanley cut its price target by 70p to £13.50 and said stocks exposed to London commercialproperty would turn from "heros to zeros" in the next 12 to 18 months as sentiment turned.

The FTSE 100 meanwhile rallied — after a strong opening on Wall Street — and closed up 57.7 points at 6,363.9.

It was helped by a surge from Cable & Wireless, up 7.5p to 174.3p after a positive note from Paul Howard of Cazenove who said that the telecoms group would beat its revenue targets, that it was likely to start a formal break-up process next May and that the controversial bonus pool for top management would total £250 million if C&W reaches its 230p price target. C&W’s arch rival, Global Crossing UK, reported strong results overnight, which Bear Stearns believes C&W should be able to match.

Scottish & Newcastle fell 3½p to 611p as Merrill Lynch said that Carlsberg had indicated that it would not be bidding for the UK brewer. However, the talk from industry watchers is still that S&N is willing to sell for something over 800p.

Royal Bank of Scotland fell 6½p to 535p as investors fretted about its likely purchase of ABN Amro in the current credit environment.

Lehmans cut its price target on Drax from 630p to 540p, adding its voice to mounting criticism of its decision to replace a special dividend with a share buyback. Drax lost 9p to 618½p.

New York: Strong gains among blue chips and the mortgage lender Countrywide Financial helped to push the Dow Jones industrial average up 133.30 points to close at 13,424.90.

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