NOT even news of the largest ever acquisition by a British company could breathe life into a market that remained gripped by interest rate worries and the strength of sterling following last week's surprise quarter of a percentage point rise in base rates.

British Telecom's £12 billion deal with US long distance carrier MCI, unveiled at the weekend, was initially the main talking point. The FTSE 100 index's firm opening at 3,955, some 7.6 points above Friday's close, led to early hopes that euphoria surrounding the deal would provide the spur to shake off last week's gloom.

The bulls of the BT deal piled into the stock which was said to account for a gain of just over 8 points on Footsie, helping to prevent an even larger slide in the leading index. Telecoms was by far the best performing sector of the day. Analysts expect further consolidation in the sector following the BT deal and investors used the occasion to bet on issues such as Orange and Vodafone.

But as the day wore on, worries about interest rates and the strength of sterling returned to the fore. These concerns were heightened by the publication of stronger than expected MO money supply statistics and firm housing starts data. Analysts suggested the strength of MO figures may be a sign of strong retail sales growth for October.

This all served to increase investor anxiety and prompted a turnaround in the fortunes of both equities and bonds. Long dated gilts closed a quarter of a point lower.

Explaining the change in sentiment, Mr Robert Barrie, chief European equity economist at BZW, said: "We are caught between last week's rate rise and the coming budget. If we see a tight budget some of the heat may be taken out of interest rate expectations which may take some of the heat out of sterling."

The death at the weekend of a Conservative member of Parliament, reducing the government majority to one, also added to the market's jitters with political uncertainty once again becoming a factor.

The index traded between three and five points lower into the afternoon, when concerted selling in Footsie futures prompted a late sell off in the cash market. Concern among traders that a land slide Democratic victory in the US could unleash a series of spending pledges, and thereby trigger a US market slide, weakened gilts and further dented sentiment in equities.

However, the early strength on Wall Street indicated that few were worried about such an outcome in the US, with the opinion polls indicating that President Clinton's lead was narrowing.

The FTSE 100 index eventually ended at 3,908.1, down 20.4 on its previous close, having touched a low of 3,924.7 in the last half an hour of trading. The FTSE-250, which has proved resilient in recent sessions, fell 10.8 to 4418.4.

Volume recorded at 6 p.m. was 648.8 million while the value of customer business recorded on Friday was a measly £907.9 million.