Investors today battled against heavy falls in London's leading shares after M15 raised the UK security threat level to critical in the wake of foiling a major terrorist plot to explode aircraft in flight.

The FTSE 100 index of blue-chip companies lost more than 100 points in heavy trading during the first hour, a fall of 1.8 per cent, before recovering through the afternoon to close down 37.1 at 5823.4. Travel, leisure and telecoms stocks bore the brunt of falls.

Sterling fell more than 1.5 cents against the dollar on the foreign exchange markets, reaching a low of $1.9070. It later rebounded to $1.8903. Oil fell more than $2 to $74.40 a barrel as investors anticipated lower demand for airline fuel.

At the day's low, an estimated £27 billion was wiped off the value of the UK's leading companies.

The Financial Services Authority, the markets regulator, said that it, the Bank of England and the Treasury were "closely monitoring" the situation but declined to comment further.

The FSA, Bank and Treasury formed a tripartite group last year in the wake of the July 7 bomb attacks to explore how well-prepared the City is to tackle a major terror attack and are responsible for ensuring stable markets during a crisis.

Among airline shares, British Airways slumped 5 per cent, down 19.75p at 370.25p amid heavy dealing volumes as it cancelled all of its UK and Europe short-haul flights.

Acting on Government advice, the airline had already banned all hand luggage on planes leaving the UK amid tighter security at every British airport.

Other airlines also suffered, with Ryanair and easyJet both falling. Ferrovial, the new owner of Heathrow and Gatwick airports operator BAA fell on the Madrid stock exchange.

David Buik at Cantor Index said today's terror alert was "the trigger, not necessarily the bullet" that prompted the heavy market falls.

Mr Buik pointed out that ahead of the market opening the futures markets were already indicating sharp falls. "The market is already lacklustre and looking very heavy at heart," he said.

He also noted that the second-quarter results season is almost over and that the economic outlook for the third and fourth quarters both in the UK and the United States "looks murky".

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