Poor US housing data drags London market into the red

Figures released by The National Association of Realtors reported an unprecedented drop in sales last month of previously occupied homes in the US.

Total sales were down 27.2 per cent to 3.83 million, far below the predicted 4.6 million.

As the report was issued, Chicago Federal Reserve President Charles Evans warned that the risk of a double-dip recession was higher than six months ago although he did not think output would contract.

The US housing market has been mired in weakness following the end of a homebuyer tax credit in April, which pulled forward sales and building activity.

The surprisingly weak home sales data added to signs that the economy was rapidly losing strength, even though the drop may have been exaggerated by the end of a popular housing tax credit. Stubbornly high unemployment has burdened recovery from the longest and deepest recession since the Great Depression.

The US Government on Friday is expected to revise down growth in second-quarter gross domestic product to an annual pace of 1.4 per cent from 2.4 per cent.

The effect of the uncertain economic outlook rippled across the Atlantic, where the London market closed 78.89 points down, or 1.5 per cent, to 5155.95.

As the FTSE 100 Index closed, Wall Street's Dow Jones Industrial Average was down just under 1 per cent, while the Nasdaq Composite was off just under 1 per cent and the Standard & Poor's 500 Index declined just over 1 per cent.

Traders' nerves are unlikely to be soothed anytime soon, with further US figures on durable goods orders, consumer confidence and revised second quarter GDP due later this week, as well as the latest speech on the state of the US economic recovery from Federal Reserve chairman Ben Bernanke.

Economic woes at home were compounded by a fall in the value of the pound, triggered by comments made by Bank of England economist Martin Weale, who warned Britain faces a "significant" risk of a double-dip recession.

Sterling fell against the US dollar to 1.54 and against the euro to 1.21. The fears over weaker demand meant resources stocks dominated the blue-chip fallers board, with Vedanta Resources off 8 per cent, or 155p to 1882p, and Kazakhmys down 45p to 1103p. There was further weakness for BP, which declined 131/8p to 3771/2p in a fresh slide for the oil major despite the end of the Gulf of Mexico oil spill.

The economic nerves also overshadowed upbeat results from media and advertising firm WPP after it raised its revenues outlook for the full year due to a stronger-than-expected turnaround in North America.

Chief executive Sir Martin Sorrell also said major global economies were likely to avoid a double-dip recession, but this was not enough to lift the downbeat mood of investors as shares fell 261/2p to 6441/2p.

Building supplies firm Wolseley, which is heavily exposed to the US economy, also fell 67p to 1239p on the day that it announced a 43m deal to sell its Brandon Hire tool business. Analysts expect further disposals after a review by Wolseley put 19 firms on a list of operations to improve or sell.

In other corporate results, housebuilder Persimmon was buoyed by news that it restored its dividend payments and said it was cautiously optimistic about prospects following higher half-year profits of 39.4m. Shares recovered from falls earlier in the session and closed 11/2p up at 3481/8p.

Punch Taverns shares were 71/4p higher to close at 853/8p after an improved trading performance in its managed pubs estate led it to forecast full-year profits marginally ahead of its previous expectations.