London reacted to a storm of bad news on financial stocks from America with the FTSE 100 closing down 135.5 points at 6,586.1. The index had fallen more modestly in early trading on indications last night from the US Federal Reserve that there would be no further rate cuts this year, but the selloff accelerated when Wall Street opened to a warning of a $30 billion fire sale at Citigroup from leading analysts at CIBC. Fears of a US recession were reinforced by poor consumer spending and manufacturing data and bad news from Ford and Chrysler.

One exasperated trader said: “We had some large-cap buying in the morning, but as the news came out of America it dried up.”

Anyone tempted to doubt warnings over Citigroup should pay attention to bets being made by traders on the side. Unable to trade in shares outright, they are using spreadbetters, such as Bets4Traders, to short the US investment banks and Citigroup in particular. Ryan Kneale, market analyst at the firm, said: “Some of our savvy clients have been consistently short on Citigroup, but the situation has now built up considerably. At the moment, more than 89 per cent of bets on Citigroup are for the share price to keep falling.” The same clients shorted Citigroup in September just before it revealed a worse than expected $6 billion write-off.

Northern Rock led the fall, off 12p at 172p on revelations of a step-up in its borrowing last week, but Barclays was close behind, down 32½p at 571½p and Alliance & Leicester dropped 38½p to 752p. Smith & Nephew fell 32p to 617½p on disappointing third-quarter results.

Housebuilders also crumbled, with Barratt Developments down 27½p at 625p, Taylor Wimpey off 9½p to 238p and Persimmon losing 39p to £10.10.

Star of the day was Unilever after better than expected figures, up 71p to £16.96.

Fellow safe-haven stocks such as BSkyB, 9½p better at 690p, and Icap, the interdealer broker, up 6p at 591p, made up only seven blue-chip gainers.

Bid talk helped to lift some mid-cap players such as Enodis, up 5¾p to 215p as rumoured US predator Manitowoc said that it was keen to make acquisitions.

De La Rue, the bank note printer, was up 1½p to 821½p, but at one stage rose 10p on trader talk that it could hand big amounts back to shareholders, particularly if it sells off its cash systems business.

Scottish & Newcastle was temporarily buoyed by speculation of a raised bid from Carlsberg and Heineken before the US fears took hold. It closed down 14½p at 768½p.

Dimension Data, the IT company that reports full-year results in two weeks, was the top mid-cap performer, up 3¾p to 66p. There have been hopes that it will sell its South African property business.

Autonomy, the search engine software group, was pushed up 56p to a new high of £10.38 by Merrill Lynch upgrading to “buy” with an £11.70 price target. It likes the growth prospects for its recently acquired Zantaz business.

New York: Wall Street was sharply lower as confidence in financial stocks evaporated on renewed fears about the sector’s exposure to credit market losses. The Dow Jones industrial average closed down 362.10 points at 13,567.90.

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