HBOS led the blue chip stocks down today after a downgrade from Credit Suisse which cut its target price from 890p to 565p and warned that a continuing fall in house prices in the UK would force it to mark more of its assets as risky, cutting its regulatory capital levels.

It said it expects a 10 per cent fall in house prices in the UK this year which would raise HBOS's level of risk weighted mortgage assets by 60 per cent. It is also exposed to downgrades of its mortgage-backed bonds. New Basel II capital requirements that came into force this year force the bank to take these into account when declaring its regulatory reserves.

"We believe the impact of an economic slowdown and in particular falling house prices on reported capital ratios could be as important as that on profits," it said.

HBOS fell 3 per cent to 532.5p. Last week its finance director told a banking conference that there had been a further deterioration in the value of some of its assets.

The FTSE 100 index was down just 2.7 at 5987.5 by 10am. The index was supported by housebuilders bouncing back from a sell off last night with Persimmon up 2.8 per cent at 706p.

Four blue chips going ex-dividend also took its toll, Pearson was down 2.5 per cent at 677.5p, Admiral lost 2.8 per cent to 773.5p, Prudential was down 2 per cent at 678.5p and Hammerson lost 19p to £10.92.

BG Group also went ex dividend but it managed a 2.3 per cent gain to £12.23 as Bernstein analysts said Europe's liquefied natural gas market was in for a boom since gas storage levels had halved in the past six months while hydro-electric generators were struggling with dry reservoirs. It was also helped by oil prices remaining firm after rallies yesterday. BP was up 1.6 per cent at 545.5p and Cairn Energy was up 2.3 per cent.

Marston's, the pub and brewing group was one of the top midcap gainers, up 3.5 per cent at 207.5p after Citigroup upgraded saying the shares had fallen too far. It was also helped by better than expected trading figures from Mitchells& Butlers up 2 per cent at 335.5p.

Taylor Wimpey was the top mid cap riser, gaining 4 per cent to 177p after Goldman Sachs raised its rating ’neutral’ from ’sell’ with an increased price target of 163p.

Barratt Developments was up 3 per cent to 387.75p after Panmure Gordon upped its rating to hold from sell.

Bid target IMI lost 3 per cent after going ex-dividend.

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