US stocks turned sharply negative in late trading last night, pulled down by cyclicals and banking shares, as interest rate worries began to eclipse rosy corporate earnings.

The market's downswing came after Federal Reserve Bank of Atlanta president Mr Jack Guynn said he did not see many signs that the US Federal Reserve's three interest rate hikes in 1999 were slowing consumer demand.

The Federal Reserve's policymaking committee is scheduled to meet on February 1st and 2nd to decide whether to raise interest rates again. Mr Guynn is a voting member.

But the stock market decline brought some relief to the euro, which remained under pressure against the dollar yesterday, briefly touching parity with the US currency in early afternoon trading, before recovering slightly.

The single currency regained some ground on foot of profit-taking and the steep decline in the Dow Jones Industrial Average.

There was also a more positive prognosis for the euro from Davy Stockbrokers, which suggested that accelerating economic growth in Europe relative to the US should drive long-term interest rate differentials in favour of the euro as the year progresses.

Davy predicted that the European Central Bank would raise interest rates by 0.75 to 1 per cent over the coming year, less than the markets are currently expecting. The rise would be higher if the single currency did not strengthen appreciably.

The euro's initial modest slide was blamed on speculation that the United States had pushed for the weekend communique from the Group of Seven (G7) industrialised nations to highlight concern at the weakness of the European currency, only for its efforts to be rebuffed by the Europeans.

Dealers added that rumours of various European central banks defending their currency had provided the euro with some much-needed respite.

However, the euro's ongoing woes left some analysts baffled.

According to Commerzbank analyst Mr Nick Parsons, suggestions that the G7's lack of support for the euro is behind a renewed wave of euro selling is "nonsensical" to the extent that nobody was seriously expecting such a result.

"We actually saw the euro touching parity. It's since clawed back some of its losses, but sentiment is pretty poor. That said, it's hard to find a fundamental reason for the move. We've seen people making up a lot of stories to fit the facts, but nothing you could rightfully call an explanation," Mr Parsons said.

As the US market moved heavily into negative territory, Mr Joe Barthel, chief investment strategist at Fahnestock & Co in Great Neck, New York, said it was very sensitive to interest rates and added: "The $64,000 question is whether the Fed will raise rates 25 basis points or 50 basis points in February."

At the close in New York, the Dow Jones was down 243.54 at 11,008.17, its biggest fall since January 4th. The British currency was the best performer among the major currencies yesterday, rallying to a near 11-year high against the German mark, encouraged by a fresh wave of British merger and acquisition activity.

The news that EMI and Time Warner Inc are to merge their music businesses also lent support to sterling.

Dealers, citing last week's government pledge to inject fresh funds into the National Health Service, said this continues to underpin sterling to the extent that it is seen as putting further upward pressure on British interest rates.

Others said comments from the president of the European Central Bank, Mr Wim Duisenberg, who reportedly suggested over the weekend that a sharp depreciation of sterling was not necessary should Britain seek to join the euro, had reinforced the pound's position via-a-vis the euro.