Alliance & Leicester and Paragon rose against a falling bank sector as short sellers closed positions on talk that the two buy-to-let lenders could be the next target for a private equity led rescue after TPG bought its discount stake in Bradford & Bingley.

Such deals, whereby a private equity firm injects cash into a listed company by taking a stake in new shares, are regarded as a growing trend in a market where private equity players are unable to raise bank debt for leveraged buyouts.

Mitchells & Butlers is holding an effective auction to allow a private equity firm to take a stake in new shares to help remove its debt and fund growth.

A&L rose 5 per cent to 420.25p while Paragon rose 5.25 per cent to 89.25p.

The FTSE 100 lost 96.9 to 5960.8 as major stocks took a dive on going ex dividend and as miners and oil stocks fell on worries over falling commodity prices.

Those trading ex dividend include Vodafone, down 5 per cent to 155p, National Grid off 4 per cent to 719.5p and Enterprise Inns, down 3.2 per cent.

Vodafone is also being hit by worries that it will overpay for Tiscali, the broadband operator in Italy and the UK that is for sale. Vodafone's debts have been mounting of late as growth in Western Europe stalls. Goldman Sachs warned that Vodafone's rumoured offer price, reported in Italian press, of E2.80 a share, or E1.6 billion (£1.27 billion) looked steep, nearly E1,000 per broadband customer, far higher than amounts paid in recent deals.

In the mid caps, Findel, the catalogue and online retailer, lost 12 per cent to 193.25p after going ex dividend.

BP lost 3 per cent and Shell 2.6 per cent.

Eurasian Natural Resources fell 4 per cent as worries over ferrochrome prices, combined with fears over the 14.5 per cent stake held by Kazakhmys, which it is considering selling when its lock-in expires on Friday.

UBS issued a bearish note on housebuilders, driving Redrow and BarrattDevelopments down 7 per cent. Taylor Wimpey lost 6 per cent and Bovis Homes 5 per cent.

Morgan Stanley helped Royal Bank of Scotland rise against the falling sector as the broker raised its view to "overweight" from "underweight", on valuation grounds.

It said: "Capital has been raised, there is potential for future disposals, and we think risks are higher at HSBC and Lloyds TSB. Our Underweight rating on RBS was built on concerns in the US, capital, dividends and the UK macro picture. Many of these are now resolved by the rights issue, alongside prudent marks in RBS’s structured credit book and extra US bad debt reserves, leaving only a UK recession and ABN Amro integration as major concerns."

Motor dealers such as Lookers, down 4 per cent to 75.5p and Pendragon, down 1.6 per cent, fell after Nationwide data showed consumer confidence in the UK plumbed new depths in May with 65 per cent saying it was a bad time to buy a car or house.

Land of Leather was on the slide again, down 0.25p to 14.25p after The Times revealed that Euler Hermes had withdrawn credit insurance from its suppliers. It has done the same to several UK retailers including MFI.

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