The index of London’s leading companies fell nearly 2 per cent yesterday as a rash of bad news from retailers and more property woes were compounded by fears that interest rates will rise sooner than they fall.

Minutes from the Bank of England Monetary Policy Committee’s June meeting showed that members had discussed the idea of an immediate rate increase, with analysts suggesting that the pendulum had now swung to a rise, rather than a cut.

The FTSE 100 slumped 105 points to 5,756.9. Property stocks weighed on the index all day, with heavy falls for housebuilders and commercial property groups.

In notes to clients, Goldman Sachs said that the housing market was only at the start of a “deep downturn” that could last up to three years. Persimmon, which is due to leave the FTSE 100 tomorrow, led the blue-chip fallers, closing down 33½p, or 8.1 per cent, at 379½p after Goldman said that it was on its conviction “sell” list along with the 250’s biggest faller, Redrow, down 29¼p, or 17.5 per cent, at 137¾p.

Goldman’s comment that the sector was “not out of the woods yet” was bad news for Taylor Wimpey, which closed down 5¾p at 68p, Barratt Developments, off 10p at 80½p, and Bellway, which fell 55p to 473p.

Credit Suisse said that commercial property rental growth and values were under threat, with office and retail property likely to be hit worst. The bank said that the sector’s share prices could fall another 26 per cent after their 18 per cent slip since June of last year and it downgraded the sector to “underweight” from “overweight”.

The bleak outlook and stock downgrades hit Land Securities, down 53p at £13.32, Great Portland Estates, off 18p at 352¼p, and Segro, 18¾p lower at 400¼p. British Land fell 33½p to 759½p.

Retailing’s misery will continue long into the year if comments by J Sains-buryare anything to go by. The supermarket group’s first-quarter results disappointed, sending the shares 10½p lower to 325½p. Tesco was down 11.7p at 381.3p, Wm Morrison fell 6½p to 271¼p and Marks & Spencerwas 18¾p lower at 341¼p.

Banks fell after Morgan Stanley, the American investment bank, reported a 61 per cent plunge in second-quarter profit, led by Royal Bank of Scotland, down 12p at 229¼p. Barclays, down 14¼p at 326¼p, also failed to hold on to Tuesday’s gains.

There were few risers, although GlaxoSmithKline rose 22p to end the day at £11.02 after winning a three-year contract to supply the Government with Cervarix, the cervical cancer vacine.

International Ferro Metals led the FTSE 250’s risers, climbing 9p to 149p, aided by the prospect of rising ferro-chrome prices and by Merrill Lynch initiating coverage with a “buy” rating.

Newspaper stocks fell after Gannett, the American owner of Newsquest, which publishes regional papers such as The Herald in Glasgow, said on Tuesday that British classified advertising revenue was down 14.7 per cent in May. Trinity Mirror fell 23½p to 167p.

New York: Financial shares were sold off after Morgan Stanley said that its earnings had tumbled and after Fifth Third Bancorp cut its dividend, raising fears that the effects of the credit crisis are far from over. The Dow Jones industrial average closed down 131.20 points at 12,029.10.

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