Top share index fell sharply on Tuesday after Greek Prime Minister George Papandreou stunned markets by calling a referendum on a second bailout deal, raising the prospect that the Greeks, angry at harsh austerity measures, may reject it.
Figures showing big manufacturers in China, the world's second-largest economy and the top metals consumer, ran at their slowest pace in October since early 2009 increased investors unease, prompting them to sell mining shares heavily.
Analysts said that a negative vote on the 130-billion-euro bailout plan, struck last week by the euro zone leaders, might further deepen the two-year old debt crisis and result in a default by Greece, which in turn might affect the euro and threaten a fragile economic recovery.
Considering how persistently Greece and Germany have pushed for this long awaited deal, it seems quite unnecessary to risk undoing all the progress to date just to gain extra Greek votes, said Jordan Lambert, a trader at Spreadex.
This uncertainty is likely to create turbulent times in the weeks ahead as it will take some time for Papandreou to organise the referendum.
British shares hit their highest in nearly three months late in October on hopes that the euro zone deal would help resolve the crisis that has threatened economic growth, created a political turmoil and raised unemployment and debt levels. A Greek referendum might jeopardise those plans and push the market further down, analysts said.
Miners <.FTNMX1770>, down 3.4 percent, featured among the top decliners, putting pressure on the FTSE 100 index <.FTSE> that was down 127.27 points, or 2.3 percent at 5,425.23 by 8:59 a.m.. The index, which fell 2.8 percent in the previous session, is down 8 percent so far this year.
Citigroup said mining companies were facing a perfect storm with falling commodity prices hitting revenue streams and costs rising based on resilient exchange rates and higher inflation.
Under current economic conditions, the mining sector is looking more fully valued, Citigroup said. We would recommend being more cautious on the sector on a 3-6 month view.
Technical analysts said that the sell-off in the past days strongly suggested that traders were jumping ship at the first sign of a reversal.
That's hardly bull market behaviour. In terms of support, the key level has got to be the top end of the range that the index breached when it rallied through 5,449, said Bill McNamara, technical analyst at Charles Stanley.
A close below that level would suggest that the run up to 5,713 was an aberration and that the trading range was back again. The next area of possible support is at around 5,310.
Investors awaited macroeconomic data that is likely to show that Britain's economy probably picked up over the summer, though any third quarter growth will not change a picture of an economy teetering on the brink of recession as crucial growth drivers such as manufacturing are stalling.
Among individual movers, G4S
(Additional reporting by Jon Hopkins. Editing by Jane Merriman)