More grim statistics on the UK manufacturing sector set the trend for the day in the London market.
The FTSE 100 index was off 85 points in mid-morning, compounding Friday's 74-point fall as it responded to July's purchasing managers' index. The PMI was at its lowest since September 1992, when Britain pulled out of the European exchange rate mechanism.
The index added further weight to last week's gloomy survey from the Confederation of British Industry, which reported the lowest level of business confidence for seven years.
It also came after big falls in equities in New York, Hong Kong and Japan late on Friday and early yesterday.
The scene would have been set for an equity rout at the beginning of one of the heaviest weeks in the interim reporting season but for one thing.
Sterling, the strength of which has undermined the profitability of big exporters and overseas traders, particularly in the engineering sector, weakened yesterday. Sterling closed below DM2.90 against the German currency for the first time in almost two months.
Consequently, Footsie rallied throughout the day to close 27.3 off at 5809.7, a drop of 6 per cent from the record high a fortnight ago. The FTSE 250 index fell 34.8 to 5447.9 and the SmallCap 12.2 to 2460.3.
A weak start to trading was flagged by a new pre-market index which started yesterday.
Taking into account orders posted before the official opening at 9 a.m., it showed the market opening 4.8 points lower. The gross impact of dividends on the FTSE 100 was 6.4 points.
A spokesman from FTSE International, which is producing the information with Reuters, said that in spite of a quiet start to the day, the index gave an accurate picture of initial interest.
The market trended lower for most of the morning but there was little heart in the selling as dealers remained on the sidelines ahead of Thursday's pronouncement from the Bank of England's latest monetary policy committee meeting.
In the light of the manufacturing downturn, few strategists expect a further rate rise. But Mr Michael Saunders, of Salomon Smith Barney, flies with the hawks and forecasts a quarter-point rise to 7.75 per cent.
"Although growth is slowing, it is not clear that the slowdown will be long or deep enough to reverse the recent rise in domestic costs," said Mr Saunders.
Mr Richard Jeffrey, the consistently bearish Charterhouse Tilney strategist, argued that any shift from a high-rate scenario would provide little relief. "This market has moved from fearing rates will go up to fearing the impact on profitability. It is caught between the devil and the deep blue sea," he said.
Turnover by 6 p.m. was relatively light at only 650 million shares with interest evenly split between Footsie and non-Footsie stocks.
