The FTSE sell off accelerated this afternoon after Wall Street opened down, hit by a surprise warning from American International Group, the world's biggest insurer, after it said that writedowns on toxic debt such as CDOs would be nearly $6 billion (£3 billion) compared with the $1.6 billion it had previously suggested.

It also said its auditors had concluded that there was a “material weakness” in internal controls over financial reporting and oversight related to the fair value of super senior CDS portfolios.

The stock slumped 11 per cent to its lowest level for nearly four years

The FTSE was down 92 at 5691.4 by 3.14pm. It was not helped by data showing rising inflation in the UK, which dampens the chances of further heavy rate cuts. Financials had already been falling after warnings from the Group of 7 finance ministers that the write down of property related derivatives would be far higher than the US Federal Reserve had predicted.

Aviva, Resolution, Old Mutual and Standard Life were all off by about 5 per cent. Standard Chartered, down 4 per cent, was also hurt by revealing that it would not be able to refinance its Whistlejacket Capital SIV fund as hopes because it had breached bank covenants.

Alliance & Leicester was hurt by the interest rate sentiment and by HSBC cutting its target price from 770p to 620p. A&L shares lost 25p to 582p.

Taylor Wimpey and Persimmon were down 4 per cent and 3 per cent, respectively, at 168.5p and 686p, while Barratt Developments was the casualty of the mid-caps, down 3.5 per cent at 364.75p after Goldman Sachs added it to its "conviction sell" list with a 316p price target, cutting from 416p.

Friends Provident, the insurer, was one of the top gainers, up 2.7 per cent at 134.7p after The Sunday Times reported that it had rebuffed a tentative offer from JC Flowers at about 170p and was holding out for 200p.

GlaxoSmithKline rose 2 per cent to £10.93, rebounding from its warning last week, after UBS upgraded the shares to "buy" with a price target of £13.50 pence.

Gold, silver and copper all saw gains and platinum hit a record high as South Africa's power problems continued. That helped to make Kazakhmys one of the top gainers, up 2.8 per cent at £12.82 while Antofagasta added 2.3 per cent to 739p.

Threats from Venezuala that it would oil halt exports to the US helped the oil price to hold near $92. Shell was up 1.2 per cent at £17.10 while BP was up 1 per cent at 552.4p.

Capita, the outsourcing group that recently lost the congestion charge contract in London, has failed today to win the contract to handle the digital switchover for the BBC. It lost 3 per cent to 621p while Eaga, the company that won it, was the top mid-cap performer, up 8 per cent at 180p. The other company shortlisted was Vertex, the privately owned group spun off from United Utilities.

FKI also outperformed, 7 per cent ahead at 69.25p, after reports that the US private equity firm Blackstone Group was considering a new bid for FKI of between 90p and 95p a share.

IMI, a fellow mid-cap engineer, was up 9 per cent on heavy volume to 398.5p.

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