Market hits new low after Bush speech

UK shares this morning fell sharply after yesterday's modest recovery, dropping to a new, seven-and-a-half year low.

Despite strong results from the mortgage bank Northern Rock, the FTSE-100 was down 61.4 points, or 1.7%, at 3,428.6. Banking shares took the brunt of the lack of investor confidence with Abbey National down 6.3% and the insurer Friends Provident off 5.7%.

The tumble came despite a strong close from Wall Street last night, where the Dow Jones industrial average closed up 99 points at 8,089, following better than expected consumer confidence data.

However, traders are now forecasting a sharp fall on Wall Street this afternoon, and the expectations weighed on London trading. Shares were also down elsewhere in Europe, with Paris 1.3% lower at 2,761.8 and Frankfurt falling 3.1% to 2,589.3.

Shares hit the new low following a tough speech by President George Bush last night. In his state of the union address, Mr Bush made it clear that the US was determined to remove Saddam Hussein unless the Iraqi leader rid himself of weapons of mass destruction.

"We will consult, but let there be no misunderstanding: if Saddam Hussein does not fully disarm, for the safety of our people, and for the peace of the world, we will lead a coalition to disarm him," Mr Bush said.

The president's remarks were taken as a clear indication that the White House was determined to press ahead with military action, with or without international support.

"Bush has confirmed in his speech that a war is going to happen and that's why the markets are down," Nigel Cobby, managing director of European equities at JP Morgan, told Reuters. "Fundamentals, relative valuations, all of the normal criteria mean nothing until it's out of the way ... And to be brutally honest, as far as the market is concerned, the sooner the better."

In another sign of nervousness on financial markets, the dollar approached its lowest levels against the euro in three years. Traders said the dollar was under renewed pressure after Mr Bush's tough speech.

"It's a continuation of yesterday's flows," a trader said. "There is dollar selling across the board on Bush and Iraq."

The dollar weakened to $1.0899 per euro, compared with three-year lows of $1.0907 set on Monday.