Downbeat US data keeps London mired in the red

Officials said claims for unemployment benefits rose unexpectedly last week, while the Federal Reserve of Philadelphia added that manufacturing activity in the country's mid-Atlantic region had dropped.

The FTSE 100 Index slumped 91.58 points to 5211.29, while Wall Street's Dow Jones was more than 1 per cent lower by the time of London's close.

The latest data will fuel fears that the pace of recovery of the US economy is starting to slow, a sentiment shared by the US Federal Reserve last week.

US data yesterday also showed a gauge of the economy's prospects barely rose last month, indicating growth continued to lose momentum after a brisk first quarter.

"It is certainly disheartening news about the economy," said David Resler, chief economist at Nomura Securities International in New York.

"It is not persuasive evidence that we have dipped into recession again but it's certainly suggestive of a more serious deterioration than we had factored into our forecasts."

Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 500,000 last week, the highest since mid-November, the Labor Department said. It was the third straight week of gains, a trend last seen in January.

The London market had earlier been in positive territory after the Office of National Statistics reported a stronger-than-expected July for UK high street retailers and signs of an improved trend for the public finances.

The CBI snapshot of the UK manufacturing sector for the last month was also positive with order books at their best level for two years.

The contrasting economic picture for the UK and United States was reflected in the currency markets, with the pound up against the greenback at 1.56 dollars and also healthier against the euro.

Yesterday's UK retail figures, which showed sales volumes up by 1.1 per cent in July, offered a short-lived boost to a number of stocks prior to the US setback.

However, Morrisons clung to positive territory with a rise of 53/8p to 287p while Sainsbury's shares added 13/4p to 3567/8p after industry figures earlier this week suggested the pair had improved their market share. The fallers' board saw United Utilities drop 3 per cent, or 17p to 5721/2p, after JP Morgan downgraded the stock and said earnings forecasts were at risk because of factors such as higher property rates.

Severn Trent was also impacted by the downgrade as it fell 22p to 1300p, while in the FTSE 250 Index South West Water owner Pennon dropped 201/2p to 566p and Northumbrian Water eased 63/8p to 3131/2p.

Insurers were lower after a week of speculation about potential consolidation in the sector generated buying interest. Prudential eased 171/2p to 570p and Standard Life dropped 33/8p to 205p.

On the results front, shares in Cineworld slipped despite the cinema operator reporting a 5 per cent rise in half-year earnings to 24.4m.

It also forecast a boost from a decent schedule of film releases in the second half, but shares drifted 101/4p to 199p in the wake of the results.

John Menzies, the aviation services and newspaper distribution firm, said it expected full-year figures to exceed current market expectations.

Shares were 6.5 per cent, or 27p, higher at 441p.

The biggest Footsie risers were Serco Group up 14p to 562p, Arm Holdings ahead 61/8p to 3201/4p, Morrisons and Randgold Resources ahead 50p to 5820p.

The biggest Footsie fallers were Inmarsat down 37p to 688p, Vedanta Resources off 104p to 688p, Eurasian Natural Resources down 401/2p to 886p and Cairn Energy off 203/8p to 4591/4p.