London’s blue chip market crashed through the psychological 5,700 point barrier yesterday, dragged lower by the banking sector and weaker mining stocks. The City reflected that mid-May’s peak of more than 6,350 seemed a distant memory, with few signs of encouragement on the horizon.

Rumours of a profit warning by Merrill Lynch’s American operation and a rise in oil prices added to losses.

HBOS, Britain’s biggest mortgage lender, led banking fallers, down 14½p to 282¼p, hovering just above the offer price of its £4 billion rights issue, as a rash of analysts cut price targets. Royal Bank of Scotland lost 5½p to 219¼p and Barclays fell 7½p lower to 308¼p, despite news that it is negotiating a cash injection from Japanese financial group Sumitomo, first revealed by The Times.

Miners failed to hang on to Thursday’s gains as Vale, the Brazilian iron ore producer, quashed speculation that it was interested in a big acquisition. Anglo American fell 83p to £34.35, BHP Billitonlost 63p to £18.87 and Xstrata was down 60p at £41.98. Antofagastabucked the trend, up 30p at 665p, after securing environmental approval for its Esperanza project in Chile. The FTSE 100 lost 87.6 points to close at 5,620.8.

Housebuilders were the big gainers of the day after reports that Barratt Developments’ banks were willing to waive its loan covenants if the company were to breach them. Building magazine said an agreement had been reached to waive a clause that could have put the housebuilder in breach of its lending covenants after it writes down the value of its land bank next month. The company gave warning last week that there would be “limited” writedowns on its land bank this financial year, owing to a weaker property market.

However, analysts have been concerned that unless the housing market improves, the situation could be far worse in the year ahead.

Barratt’s shares led the 250, up 9½p at 87¾p, also boosted by Landsbanki retaining its “buy” recommendation on the stock, with a target price of 250p. The report lifted most of the sector with Bellway gaining 48p to 524p, Taylor Wimpey rising 3¼p to 69¾p, and Persimmon up 5¾p at 370¾p.

Retailers suffered a reality check following strong May sales figures this week, with Debenhamsthe 250’s heaviest faller, down 4½p to 44p. It is understood that at least two privately owned retailers are in trouble and talking to administrators.

A torrid week for J Sainsbury, including a disappointing trading up-date and website problems, was eased slightly as it added 3¼p to 325¾p.

Wolseley was the biggest blue-chip faller, down 24¾p at 445½p, after Morgan Stanley cut its rating on the building materials group, saying that expectations were too high and that there was scope for disappointment.

Power generators British Energy, up 15½p at 706½p, and Drax, up 26½p at 718½p, were boosted as Deutsche Bank said a tighter supply and demand balance in electricity from 2010 to 2015 will increase the groups’ financial and strategic value.

New York: Stocks slumped after a series of ratings downgrades for bond insurers, and cuts to analysts’ earnings estimates for investment banks. At the close of trading, the Dow Jones industrial average was down 220.40 points at 11,842.70.

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