US recovery concerns drag FTSE to a three-month low

An unexpected rise in weekly jobless claims in America sparked concerns over the health of the US economy and dampened hopes for a key

employment report today.

London's blue chip share index tumbled 2 per cent, or 113.84 points, to 5139.31 – a level not seen since early November – as world indices also slumped into the red.

The Dow Jones Industrial Average on Wall Street fell 200 points within the first few hours, while across Europe the sell-off left Germany's Dax and the Cac 40 in France more than 2 per cent lower.

A recovery in employment is seen as the biggest obstacle to a US rebound and the unexpected increase in weekly unemployment claims provided a reminder that a recovery will be difficult.

Yesterday's gloomy figures showed unemployment claims rose 8,000 to a seasonally adjusted 480,000 last week. Economists had predicted claims would drop to 460,000.

In another report, the US Labor Department said non-farm productivity grew at a 6.2 per cent rate in the fourth quarter as employers ramped up output at the quickest pace in six years and kept a tight lid on costs.

Analysts had expected productivity, which measures the hourly output per worker, to rise at a 6.0 per cent rate after gaining 7.2 per cent in the third quarter.

Some doubt business will continue to boost productivity with a depleted workforce.

The dollar gained strength as investors piled out of equities, with the pound down nearly 1 per cent to 1.58 dollars.

The euro fell to an eight-month low against the dollar, to 1.37 dollars, as it was also hit by fears over the single currency and the state of the Greek economy.

Miners and financial stocks bore the brunt of the declines as metal prices fell on a stronger dollar and as many heavyweight banks were down on negative broker comment.

Among miners, Kazakhmys closed down by 10 per cent, or 126p, to stand at 1199p.

Royal Bank of Scotland was one of the bank fallers after a broker downgrade from Exane BNP Paribas, which sent shares 2p lower to 333/8p. Barclays was another prominent casualty – down 231/8p to 2721/4p – while Lloyds Banking Group shed 33/4p to 511/4p.

The Bank of England's decision to call a temporary halt to its quantitative easing operations came as little surprise to traders.

But falls were compounded by the performance of Royal Dutch Shell after the oil heavyweight revealed a 75 per cent slump in fourth quarter profits.

Shell blamed weaker refining margins and general economic pressure, but with the group continuing to lag behind its rivals shares lost another 431/2p to 1666p, a drop of 3 per cent. BP shed 91/4p to 5651/8p.

In a busy session for corporate results, insurer Aviva edged lower – down 17p to 381p – despite beating market expectations with a 14 per cent drop in new business sales.

Drugs giant GlaxoSmithKline and mobile phone group Vodafone were on the shortened list of share risers thanks to encouraging news for investors.

Vodafone rose 43/4p to 1391/4p after showing improvements in its embattled UK and German markets, while Glaxo lifted 9p to 1226p as it targeted a further 500m in cost savings by 2012.

The biggest Footsie risers were Vodafone, Autonomy ahead 43p to 1636p, Associated British Foods up 8p to 890p and GlaxoSmithKline.

The biggest Footsie fallers of the day were Kazakhmys and Antofagasta off 711/2p to stand at 830p.