Insurance stocks led the market lower as the FTSE 100 came close to breaching its October lows.

Shares in Aviva fell 16.8 per cent to 292¾p, Prudential dropped 16.3 per cent to 246p and Legal & General shed 13.5 per cent to 60.3p on fresh concerns about capital positions and rights issues.

Traders said these had been sparked not only by weakness in equities but also in credit markets, where corporate bonds in the US and Europe have fallen to fresh lows.

Investors are worried that life assurers’ corporate bond portfolios would be hit by a wave of defaults. This would eat into their surplus funds, forcing them to raise capital, and cut dividends, probably next year. Indeed, there were vague rumours that Prudential was looking to raise capital.

The FTSE 100 fell 130.7 points, or 3.3 per cent, to 3,875 – just 23 points from October’s 5½-year low. Over the past two sessions the blue-chip index has fallen almost 8 per cent and is down 40 per cent for the year.

Elsewhere, the FTSE 250 dipped 127.9 points, or 2.2 per cent, to 5,578.7. The falls were triggered by further gloomy US jobs data and concerns about the future of Citigroup, whose shares tumbled again.

Trading volumes were above the recent average, with almost 4bn shares changing hands.

Commodity stocks took another beating. US crude futures briefly fell below $50 a barrel as concerns that the global economy was heading into a deep slump intensified.

Xstrata slid 11.4 per cent to a four-year low of 625p, while Vedanta Resources lost 11.5 per cent to 387¾p and Rio Tinto shed 10.4 per cent to £20.22.

Rio was also hit by fears that it might require a rights issue to help pay down debt.

Severn Trent lost 6.2 per cent to £11.89 after Merrill Lynch withdrew its “buy” recommendation in a sector review.

“The four quoted UK water utility groups all report half-year numbers next week, and we anticipate that there’ll be little cheer for investors – either in the numbers, or the broader outlook for the sector,” warned analyst Fraser McLaren.

Smiths Group, the engineering conglomerate, managed to buck the weak market trend, firming 2.3 per cent to 756½p on the back of a Cazenove upgrade to “outperform” on the grounds that investors could pick up a reliable, defensive company at a 20-year low.

Retailing stocks also ended higher. Solid results from Mothercare, up 8 per cent at 290p, and retail sales figures for October that exceeded expectations were behind the gains. Kingfisher added 3.3 per cent to 102.9p, while Next put on 4.3 per cent to 970p and Marks and Spencer advanced 3.3 per cent to 206½p.

Kingfisher, the parent company of B&Q, was also supported by a Deutsche Bank “buy” recommendation. “We believe Kingfisher will beat market expectations for 2008/09 by 8 per cent due to stronger gross margins, lower costs and currency benefits,” it said. Kingfisher is due to issue a trading statement.

Among the mid caps, BlueBay Asset Management dropped 22.2 per cent to 105p after UBS took up coverage with a “sell” rating.

William Hill added 6.6 per cent to 164¾p as UBS removed its “sell” rating on the bookmaker citing valuation grounds.

However, the broker cautioned clients that the shares would remain under a cloud until the company completes its refinancing. William Hill has £1.2bn of debt maturing in March 2010.

Rival Ladbrokes rose 9.5 per cent to 161p. Axel Springer bid rumours continued to support European newspapers group Mecom, up a further 52.3 per cent to 2.3p. There was also talk that Springer had been in the market over past days amassing a stake.

Taylor Wimpey eased 6.2 per cent to 8.71p as traders reacted to news that Fitch had downgraded the housebuilder’s senior unsecured ratings to CCC.

Alastair Stewart at Dresdner Kleinwort said: “The content of the statement was extremely concerning and highlighted the possibilities of covenant breach, distressed debt for equity swaps and even forced liquidation.”

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