WORRIES about the next move in US interest rates cast a dark shadow over the British stock market yesterday. Share prices retreated sharply at the start of the day before staging a strong rally towards the close.

Prices were hit badly at the outset as traders in London took fright at the poor performance of US Treasury bonds overnight.

There was good support for London and other European markets later in the day, however, when Wall Street opened on a steady note and began to make good progress as the session wore on.

The absence of any heavy-weight selling pressure by the big British institutions, however, was one of the reasons behind London's late recovery and the FTSE 100 Index managed to end the session only 1.8 off at 3,905.7.

Further evidence that the institutions preferred to stand back and wait for the next moves in global interest rates came with the steady showing of London second-line stocks in the FTSE Mid 250 Index.

The index closed 3.5 higher at 4,428.3, not far short of the day's best, 4,429.0.

With prices of the leading stocks under real pressure shortly after the start of trading, there was no substantial selling of the second liners and the FTSE Mid 250 was never lower than 3 points off during the session.

There was no real weight of trading in London, however, with turnover at the 6 p.m. reading coming out at 563.2 millions shares, with non-FTSE 100 stocks accounting for 56 per cent of the overall total.

Senior marketmakers said yesterday was no more than a continuation of the bank holiday, with many of the top dealers extending the weekend break.

One main dealer said the London market needed to consolidate after its recent strong performance and would want to see US bonds and UK gilts steady before it made any further progress.

Some bulls said 4,000 on the FTSE 100 was still a possibility, but only if there was a burst of takeover activity in the market place.

The FTSE 100 kicked off the session almost 18 points lower and continued to slide during the first hour of trading.

Thereafter, sentiment began to pick up and the FTSE 100 moved briefly into positive territory, just after Wall Street opened for business.

At the day's best the FTSE 100 was 1.3 higher at 3,908.8. Thereafter, it slipped away to end the session marginally lower.

The big winners in the FTSE 100 included Pearson, the media group, whose shares surged ahead amid talk of a break-up bid for the group, while BAT Industries featured with a near 3 per cent rise after positive news from the US.

On the downside Standard Chartered were unsettled by a sell note issued by one of the top broking firms.