Blue chips shares fell nearly 2 percent on Monday, led by commodity stocks and banks as socialist Francois Hollande's victory in the first-round of the French presidential election and a teetering Dutch government rattled investors.
Hollande's marginal lead over incumbent French President Nicolas Sarkozy after the first round added to concerns over the euro zone debt situation. Some analysts said a defeat for Sarkozy in the May 6 second round could weaken cooperation between France and Germany in dealing with the debt crisis.
If Sarkozy had won comfortably yesterday, it would have been business as usual with France and Germany trying to hold the euro zone together, said David Miller, partner at Cheviot which has assets under management of about 3.5 billion pounds ($5.64 billion).
However, the new prospect of a new President and new approach to dealing with the euro zone crisis has made investors and European markets nervous. We'll see muddled markets until the final result is declared.
Further uncertainty came as the government in the Netherlands, a core euro zone member, failed to agree on budget cuts and was expected to resign, making elections almost unavoidable and casting doubt on Dutch support for future euro zone measures.
Investors will be trying to gauge whether this uncertainty (generated in France and the Netherlands) will be a hurdle to officials making progress in solving the debt crisis which is the biggest determining factor in financial market performance during the course of this year, Henk Potts, equity strategist at Barclays Wealth, said.
The FTSE 100 index <.FTSE> was down 99.43 points, or 1.7 percent, at 5,672.72 by 11.12 a.m. British time, having gained 0.5 percent on Friday and 2.1 percent on the week - its best weekly performance since the start of February.
Only two blue chips shares rose: Vodafone
Vodafone gained 0.9 percent after it agreed to buy Cable & Wireless Worldwide
C&W Worldwide topped the midcap leader board, rallying 15.5 percent to just below the offer price.
BSkyB rose 1.3 percent aided by its ongoing share buy-back programme, and ahead of third-quarter results due on May 2.
IAG SHARES TUMBLE
Otherwise, heightened investor nervousness weighed on markets, reflected in a selloff in Dutch and peripheral euro zone bonds, driving Spanish yields back above 6 percent. The FTSE 100 volatility index <.VFTSE> jumped almost 14 percent.
U.S. stock futures pointed to a lower open for equities on Wall Street, with futures for the S&P 500, the Dow Jones and the Nasdaq 100 falling 0.9 to 1 percent.
Commodity stocks were the biggest drag on the UK blue-chip index, as copper prices and crude dropped after mixed factory activity data from China alongside the concerns surrounding the euro zone.
China's factories posted their best performance this year in April, according to a purchasing managers' survey, but overall activity still contracted for a sixth successive month.
International Consolidated Airlines Group (IAG)
The initial 172.5 million pounds price of the deal was reduced after the German carrier failed to sell two of bmi's units - its low-cost operator, bmibaby and bmi regional - prior to completion, as had been hoped.
We would have preferred if Lufthansa had been able to sell these businesses as their restructuring will take up BA management time. Nevertheless we believe that the deal price reduction will cover financial costs of (the) shutdown, Deutsche Bank said in a note.
Technical factors also weighed on IAG shares, according to Silverwind Securities, which repeated its sell stance on the stock.
Silverwind pointed out that IAG shares have fallen 2.75 percent over the last week and broken below both their 20-day exponential moving average (EMA) line, and their 50-day EMA line.
($1 = 0.6205 British pounds)
(Reporting by Tricia Wright; Editing by Susan Fenton)