Just as investors in financial shares had started to believe that their stocks were on the road to recovery, the sector was thrown into the red again.

After two days of solid gains for banking shares, in response to the US Government’s bailout of the mortgage groups Freddie Mac and Fannie Mae, the sector fell out of bed yesterday after Lehman Brothers, the US investment bank, reported a $3.9 billion (£2.2 billion) quarterly loss and failed to announce an injection of new capital. Lehman plans to sell a majority stake in its asset management unit and spin off commercial real estate holdings, hoping to restore investor confidence.

Even though traders on both sides of the Atlantic were braced for the worst, it was still a shock when the news hit, sparking renewed fears about banking’s health. Barclays was the worst-hit of the blue-chip banks, falling 19¼p to 346½p. Lloyds TSB fell 12¾p to 295p and Royal Bank of Scotland closed down 9p at 240p.

Although the American mortgage bailout has supported stocks this week, it came back to haunt Old Mutual, the London-listed life insurer (down 3½p at 97.4p), which expects its US life business to make a $135 million writedown on the value of its holdings of Freddie and Fannie preference stock.

RSA Insurancealso fell, down 10½p to 151.8p, as brokers advised clients to take profits on the stock, which has outperformed the market in recent weeks because of bid speculation.

Overall, losses for banks and insurers pulled the FTSE 100 down by 49.4 points to 5,366.2. Retailers also weighed on the index after results and updates from some of the high street’s biggest names painted a bleak picture for shop owners.

Next fell 23p to £11.20 after saying that tough trading conditions could continue into the 2009-10 financial year. However, the fashion group did manage to report first-half profits that were better than expected. The concerns did little for sentiment towards Marks & Spencer, down 10¼p at 247¾p.

Comet’s owner, Kesa Electricals, dropped nearly 10 per cent, down 15½p to 142½p, after reporting what some in the City described as “dreadful” first-quarter sales figures. Kesa’s peer DSG International did not escape, with its shares falling 2½p to 58¼p.

ITV led the index for a second day in succession, rising 3p to 48.8p amid continuing bid hopes. The appointment of Charles Allen, the former ITV chief executive, as a nonexecutive director of Virgin Media led some to speculate that Virgin may try to buy the broadcaster again.

After hours, FTSE confirmed ITV’s relegation from the blue-chip index, along with Enterprise Inns, which again had been the heaviest faller, down 30¾p to 234¼p. The pub sector was hit after Morgan Stanley advised clients to avoid leased pub groups, saying that 20 to 30 per cent of Enterprise and Punch Taverns’s leased pubs may be “uneconomic” because landlords were making less than £20,000 a year, the minimum considered to make a pub worth running. Punch fell 33¾p to 239p.

New York: Wall Street stocks rose as Opec’s move to shore up oil prices boosted energy shares and an outlook from Texas Instruments soothed fears about technology spending. The Dow Jones industrial average closed 38.20 points higher at 11,268.90.

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