Top-flight shares fell further into the red on Tuesday as traders digested the potential scale of the impact of China’s currency devaluation.
The FTSE 100 Index was 46.02 points adrift at 6690 in early afternoon trading, with indices in Paris and Frankfurt also on the slide.
The Chinese government allowed its currency to fall to three-year lows against the dollar this morning, with an overall 2% decline in value.
It represented a ‘one-off depreciation’ designed to combat the news from the start of the week that exports had faced their biggest fall in four months.
But the move sent shockwaves through global markets as dealers pondered its possible impact on prospects for a US interest rate rise.
Craig Erlam at foreign exchange dealer OANDA said it could have a significant impact on whether the Federal Reserve decides to increase interest rates this year.
He said: “ A rate hike this year already appeared to be on a knife edge, this could be enough to tip it over into next.”
China's decision to devalue the yuan was taking its toll on commodities as a whole. BHP Billiton (LON:BLT) fell 39p to 1170p, Rio Tinto (LON:RIO) dropped 53.5p to 2581.5p and
Antofagasta (LON:ANTO) reversed 9p to 585p.
But there was cheer in Europe where Athens made progress in talks to secure its third bailout ahead of a ratification vote on Wednesday and potential approval by eurozone finance ministers at the end of the week.
In UK economic news, house purchase lending rose 22% in June against May but declined slightly against the same month a year ago, according to the Council of Mortgage Lenders.
On the corporate front, bookmaker Ladbrokes (LON:LAD) slipped 0.8p to 109.2p as it reported lower profits but vowed to press ahead with changes including its planned merger with Gala Coral.
Retailer Card Factory (LON:CARD) fell 8.8p to 358.1p despite an upbeat trading update.
Support services group Serco (LON:SRP) reversed 1.4p to 124.1p after reporting a better-than-expected first half.
Just Retirement Group (LON:JRG) backtracked 4.7p to 194p as it announced plans to merge with Partnership Assurance in a £668.5mln deal.
Also in the insurance and pensions sector, the Prudential (LON:PRU) climbed 32.5p to 1539p on news of higher profits despite controversial changes in UK pension rules.
Coal supplier and transport group Hargreaves Services (LON:HSP) heated up 44.25p to 364.75p as it outlined plans to move into renewable power and biomass to guard against falling coal prices.
In small caps, North River Resources (LON:NRRP) said it is unlikely to survive if investors fail to back a US$4mln finance package from major shareholder Greenstone.
Shares plummeted 22% to 0.22p.
Conversely, Stratex International (LON:STI) was one of the biggest risers, up 6% to 2.2p. The company said mineralisation has been confirmed at the Dalafin gold project in Senegal.
Elsewhere, Eurasia Mining (LON:EUA) started drilling at its Monchetundra platinum deposit in Russia, its second project in the country. It too was higher, gaining 6.25% to 0.85p.