Confidence in the UK insurance sector was blown away with a profit warning from Munich Re of Germany, which said that plunging equity and bond values would hurt returns on its investments. Legal & General took the biggest hit, down 7.1p at 98.6p, but RSA Insurance lost 6½p to 128.8p and Aviva fell 21½p to 490p.

Confidence was not helped by German rival Hannover Re saying that it too could miss profit targets if the markets continued to lose ground.

Plummeting equity prices have been exacerbated by recent falls in bond prices, partly driven by inflation fears.

The insurance shock dragged the FTSE down 70.9 points at one stage before some reassuring economic figures from the US helped it rally, to close down 9.7 points at 5,352.6.

Royal Bank of Scotland, which is trying to sell its insurance business amid growing talk that it may pull the sale, lost 4¼p to 215p.

Fund managers who are also heavily invested in bonds were hurt too, with Schroders down 45½p at 969½p. St James’s Place lost 8p to 223p amid talk that HBOS, up 8¾p at 310¼p, wanted to sell its majority stake.Barclays, up 8½p to 356½p, also defied a sliding sector. Traders said that following its issue of new shares, its weighting in the FTSE 100 would be raised from next week, so that tracker funds would have to buy some 173 million shares.

Any stocks with Russian interests continued to tumble a day after the chief of TNK-BP was forced to leave the country and Vladimir Putin wiped $5 billion off the value of Mechel, the Russian coalminer, listed in the US, by threatening to launch a regulatory investigation over the higher prices it supposedly charges Russian steel mills compared with its exports.

Mechel shares recovered as it said that it would seek peace talks with Mr Putin, but the Moscow stock market slid dramatically and Aricom, an iron ore miner trying to raise a $1.1 billion loan, lost another 8½p to 48½p after a 9¾p fall on Thursday. Imperial Energy, the Russian oil and gas explorer, lost 76p to 972p despite having received an indicative £12.90 bid from ONGC of India.Peter Hambro Mining fell 40p to £10.76 as analysts noted that the last train carrying optimists out of Russian equities had just left the station.

Punch Taverns was lifted 14½p to 269½p by hedge fund manager David Einhorn increasing his stake from 8 per cent to 9 per cent.

Inmarsat rose 7p to 467½p after US hedge fund Harbinger said that it was planning to bid and combine it with its SkyTerra business once it obtains regulatory approval.

Housebuilders were on the slide. Goldman Sachs said Bovis Homes, down 19½p to 350½p, was likely to make substantial writedowns when it reports first-half figures on August 26. Bellway, which is bringing forward an update to August 14 because of “current difficulties in the housing market”, fell 33½p to 506p.

Trinity Mirror lost 3¼p to 89p as UBS analysts said a bid from Bennett Coleman of India was unlikely given Trinity’s mounting pension deficit and an uncertain advertising outlook.

— New York: Stocks were boosted by new data on housing, manufacturing and consumer sentiment that were stronger than expected. The Dow Jones industrial average was up 21.40 points at 11,370.70.

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