The London market suffered another downward lurch on Monday as falling mining and oil stocks dragged the FTSE 100 to its lowest level since mid-December.

Once again the selling intensified after 4pm, fuelling speculation that much of the recent weakness is related to unusual wave of derivatives activity by large investment banks and hedge funds.

They are rumoured to have made large leveraged bets on the direction of market volatility which are now unravelling. As a result they are attempting to rebalance their books by selling FTSE index futures in the last 30 minutes of trading.

“The same thing happened on Wednesday [when the FTSE 100 fell 170 points],” said one trader, noting that the Chicago Board Options Exchange Market Volatility index (Vix) hit 19.62 - a two-year high.

At the close the FTSE 100 was down 124.7 points, or 2.2 per cent, at 5,532.7 - its fourth consecutive session of losses. Over that period the index has shed 5.4 per cent. If the index slips another 9 points today it will have fallen 10 per cent since reaching a five-and-half year of 6,132.7 just over a month ago.

Lower down the market the picture was even bleaker. The FTSE 250, which fell 6.3 per cent last week, lost a further 364 points, or 4 per cent, to 8,828.6. The fall was it biggest one-day percentage loss in six years and its biggest one-day points fall on record.

Although the sell-off gathered pace in the last 30 minutes of trading, the market was in a jittery mood all-day as traders arrived at their desks to discover Asian and emerging markets had taken a battering overnight and that metal prices had continued to head south

Mining stocks felt the full force of the selling as investors decided to exit the sector. Xstrata, which raised £1.3bn in a share placing at £21 last week, lost 8.7 per cent to £17.64, while Kazakhmys fell 8.5 per cent to 958p and Antofagasta fell 7.3 per cent to £18.89.

However, the day’s biggest FTSE 100 faller was steel producer Corus, which shed 9.3 per cent to 344½p after South Korean rival POSCO was forced to accept a 19 per cent increase for its iron ore shipments this year.

Alliance & Leicester was one of just nine of FTSE 100 companies to close in positive territory The mortgage bank climbed 2.5 per cent to £11.43p after Credit Agricole confirmed what the market has long suspected - that it is considering a takeover bid.

That news helped shield the rest of the banking sector from the worst of yesterday’s selling. Northern Rock lost just 1.2 per cent to £10.05p, while HBOS ended 0.3 per cent cheaper at 895p and Bradford & Bingley eased just 1.1 per cent to 445¾p.

Unilever, the Anglo-Dutch consumer goods company, improved 0.10 per cent to £11.70 as its shares were consolidated on a 9 for 20 basis to bring their value in line with the company’s Dutch-listed shares.

Lower down the market, GCap Media, the commercial radio group, was the main talking point. Bucking the weak market trend, its shares gained 2 per cent to 230½p excited by rumours of stake building by an activist investor. Sector watchers noted that GCap is due to file preliminary figures tomorrow.

HomeServe, the home insurance group, was also in demand, rising 3.5 per cent to £14.07 after the company, which specialises in providing cover for plumbing and drainage problems, posted full-year figures that topped City expectations.

Debenhams was another standout feature but for less positive reasons. The explanation for the interest was the poor performance of its shares, which ended at a post-flotation low.

The stock, which came to market at 195p earlier this month closed 4.2 per cent lower at 178½p. Traders believe the weakness has been caused by the fact that a large portion of the flotation ended up in the hands of short-term hedge fund managers who are now selling.

The London Stock Exchange fell 4.4 per cent to £11.90 as the chances of a bidding war receded with news that the New York Stock Exchange had launched a $10.2bn bid for Euronext.

On a more positive note, Intermediate Capital Group, the mezzanine finance house, rose 0.65 per cent to £12.25 on talk of strong trading.

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