Banking heavyweights pull down FTSE

The FTSE 100's recent poor form continued yesterday with the index of leading shares chalking up its fourth straight session of losses since breaching the 4,500 level last Tuesday.

The heavyweight banking sector, which accounts for about 19% of the London market, did most of the damage as investors prepared for a flurry of half-year trading statements in the coming month.

HBOS set the negative tone for the sector. Its shares fell 5p to 714p after UBS cut its earnings forecasts for 2004 and 2005 by 4% and 5% to 77p and 86p per share respectively.

The Swiss investment bank reckons the spread on mortgage and corporate loans at HBOS is substantially lower than it was at the same time last year and believes corporate lending has slowed.

"These issues strike at the core of the HBOS operating model," UBS warned.

Elsewhere in the banking world, Northern Rock was marked 14.5p lower at 729.5p after CSFB warned clients that the next month's interim results will provide "meat for the bears". CSFB believes half-year profits will be lower than last year because of a combination of extra costs relating to regulation and accounting standards, and pressure on funding rates.

To cap things off, Barclays fell 4.5p to 484.5p, Alliance & Leicester , which issues an update on Thursday, eased 14.5p to 823.5p and Abbey National slipped 4.5p to 478.75p after JP Morgan also warned on prospects for the sector. It believes earnings growth forecasts for banks are too high because of the impact of rising interest rates.

All of which helped to drag the FTSE 100 down 50.8 points to 4,433.2, with a weak opening on Wall Street ahead of today's US inflation figures adding further pressure. A steep rise in the consumer price index this afternoon will fuel fears that the Federal Reserve is going to raise interest rates at its next meeting, on June 30.

The only consolation for traders was that yesterday's fall was not accompanied by any real selling. Market turnover was extremely light with fewer than 2bn shares changing hands.

As a result, few stories were doing the rounds though Marks & Spencer did provide one talking point. Its shares declined 6.25p to 359.75p amid speculation that Philip Green might drop his offer for the retailer despite reports to the contrary over the weekend.

Whatever the merits of the latest rumours, analysts reckon only the brave should be acquiring M&S at its current level.

In the event that Mr Green does walk away, Dresdner Kleinwort Wasserstein analyst Robert Miller reckons the share price of the troubled retailer would fall to 320p. Set against that, he believes the chances of Mr Green returning with an all-cash offer that would be accepted by shareholders is slim. He believes the risks are therefore now on the downside.

Cruise ship operator Carnival , 4p better at £25.06, was one of just five blue chips to end in positive territory as traders built positions ahead of Thursday's second quarter figures. The focus of the results will be Carnival's guidance for the rest of the year and, according to traders, recent snippets from the trade press suggest that it could be revised upwards.

SABMiller drifted down 6.5p to 676p after chief executive Graham Mackay and finance director Malcolm Wyman declared the sale of 30,000 and 12,000 shares respectively. Since the world's second largest brewer announced better than anticipated results a month ago, SAB shares have risen 9% and on Friday hit an all-time closing high.

Lower down the market, the FTSE 250 fell 59.8 points to 6,099.3 with SkyePharma , up 2.25p to 63p, one of the few stocks to buck the trend following an upgrade from Dresdner Kleinwort Wasserstein.

Lifting its rating to buy from add and setting a 94p target price, the German investment bank claimed the drug delivery company would experience a significant increase in royalty payments over the next six months and announce an out-licensing deal for a promising pulmonary product.

Internet bank Egg was also in demand, improving 4.25p to 159.25p on rumours that Prudential , off 5p at 451p, had finally agreed a deal to sell its 79% holding to US credit card company MBNA.

WH Smith, predictably, fell 12.25p to 337p as the City reacted to reports that claimed private equity group Permira might drop its 375p-a-share takeover offer because of a row over the retailer's pension fund. Merrill Lynch analyst Nick Hawkins reckons Permira is unlikely to inject any money into the fund and if it did it would seek to lower the terms of its offer. "This, for example, could bring the offer down by 5% to 356p," he said.

North Sea oil firm Paladin Resources shed 4.5p to 119p after Merrill Lynch dumped 11.6m shares on behalf of an institution at 120p a share. A spokesman for the company was unable to identify the seller.

Among the small companies, Primary Health Properties firmed 1p to 245.5p on rumours that an earnings-enhancing acquisition of a medical centre is in the pipeline.

Overnet Data improved 5p to 117.5p. After the market closed the shell company announced that shareholders had approved the acquisition of FuturaGene, a US biotech company which has patented a process allowing crops to grow in salt-rich soil.

In the bond market, the 10-year gilt closed at 98.090, yielding 5.243%.