An early promising performance by leaders on the London equity market was reversed yesterday. The market was damaged by the prolonged weakness of the Hong Kong stock market and continuing uncertainty about the UK's approach to European Monetary Union.

However, the slide was generally confined to the leaders. The FTSE SmallCap Index put in another sound showing, hitting an all-time intra-day high in mid-morning, before slipping back.

The market's second-liners, represented by the FTSE 250 Index, were never really troubled and edged higher during the morning before coming off to close narrowly lower on balance as the market drew to a close.

Hong Kong's latest slide - it dropped another 6.2 per cent yesterday to extend the fall over the past three sessions to 15 per cent - took some time to affect a market initially lifted by Wall Street's scintillating performance overnight. The Dow Jones Industrial Average shot up 139 points on Tuesday.

However, Wall Street retreated heavily yesterday, and posted a fall of over 65 points fall within an hour of London's close.

The sudden change in sentiment was a shock to traders, who were just getting to grips with the new order-driven trading system introduced on Monday.

"Everything was going fine, and suddenly we had to cope with a flurry of sell orders, which included some slightly irresponsibly incorrect numbers and which caused lots of problems, disturbing market sentiment," said one dealer.

News that China Telecom's debut on Wall Street was disappointing, kicking off at a discount to its issue price, caused further ripples of unease across London, which expects the shares to have a difficult start in Hong Kong this morning.

Steep afternoon declines in the market were in stark contrast to the morning session, when share prices across European markets motored ahead.

The FTSE 100 Index closed the session a net 77.1 down at 5,148.8, having dropped more than 100 points at worst, in mid-afternoon, when Wall Street was enduring some heavy selling.

The FTSE 250 settled 2.0 off at 4,916.6, having reached a session best of 4,933.3 in mid-morning, while the FTSE SmallCap closed 3.3 ahead at 2,405.4, having hit an intra-day peak of 2,407.4.

Early trading was encouraged by a firm gilts market, after a bigger than expected fall in retail sales last month.

Sales dropped 1.9 per cent, further than the consensus forecast of 0.4 per cent, itself expected to calm fears that UK interest rates may be lifted in the next couple of months.

Hong Kong-induced nerves drove HSBC, Cable & Wireless and Standard Chartered sharply lower.