Stocks pared early losses as US factory orders rose and investors were encouraged by Warren Buffett's latest bet.

After falling more than 80 points earlier in the session, the Dow Jones Industrial Average was down by 49.73 points or 0.51 per cent at 9,739.71 at 3pm in New York.

An ambitious move by Warren Buffett, the world's most famous investor and its second-richest man, to buy the country's second-biggest rail company, helped cheer markets.

Mr Buffett announced Berkshire Hathaway, his investment vehicle, is to buy Burlington Northern Santa Fe Corp, in a deal that values the business at around $44 billion (£26.9 billion) including debt. Mr Buffet described the move as "a bet on America."

US factory orders rose a stronger-than-expected 0.9 per cent in September and inventories continued to shrink, bolstering the prospects for a sustained economic recovery.

It was the fifth month out of the past six that US manufacturers saw orders rise, the Commerce Department said onTuesday.

Plans by Johnson & Johnson to slash up to seven per cent of its staff across the globe rattled US investors during early trade.

In London, investors were spooked by a shake-up at two big British banks.

In London, the FTSE 100 index gave up 1.32 per cent or 67.29 points to close at 5,037.21 points. Earlier it fell below the 5,000 mark for the first time in a month as worries around RBS's fresh bailout weighed on sentiment.

Developments in the UK where a European Commission ruling forced Royal Bank of Scotland (RBS) and Lloyds TSB, two of the country's biggest lenders, to divest a series of assets in return for receiving billions of pounds more of taxpayers' money further concerned investors.

RBS was down 2.72p or 7.04 per cent at 35.93p with investors taking fright at the Government's plans for tighter controls on bonuses and the bank's forced disposal of several businesses.

Mining stocks were also weighed down by a rising dollar, which hit prices of precious and other metals. Fresnillo dropped 17.50p or 2.28 per cent to 751p, Eurasian dropped 23p or 2.62 per cent to 856p and Xstrata retreated 18.5p or 2.01 per cent to 903p.

David Jones, chief market strategist for IG Index said of the market: "Over the last six weeks, dips back to here have proved to be short-lived. However, if the FTSE were to spend a couple of days or so below the 5,000 level, investors might become resigned to the fact that maybe share prices have got ahead of economic reality and it is time at the very least for a short pause."

Aviva fell 9.8p or 2.52 per cent to 379.3p as its Delta Lloyd subsidiary was floated at the lower end of its price range and its shares fell on the first day of trading in Amsterdam.

in the FTSE 250, Yell Group fell 7.78p or 15.64 per cent to 41.95p as concern mounted about whether it could win investor and underwriter support for its plans to raise at least £500 million in fresh equity. Moody's added to the worry by saying that it would not change its rating of high risk of default on Yell's bonds while doubts persisted over the equity issue. It is still reviewing the rating with a view to a downgrade.

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