Britain's top share index closed at a four-week low on Wednesday on concerns the Bank of England (BoE) and the U.S. Federal Reserve may start tightening monetary policy earlier than expected.
A day after two Fed officials suggested the U.S. central bank may cut the pace of bond purchases as early as next month, the BoE said it planned to keep interest rates at a record low until unemployment fell to 7 percent from 7.8 percent now, which it views as unlikely for another three years.
But investors reacted cautiously to the guidance after the BoE also said rates could be tightened if levels posed a threat to financial stability, if medium-term inflation expectations rose dangerously or if it forecast inflation in 18-24 months at 2.5% or higher.
"The equity markets have reacted negatively due to questions over the credibility of the forward guidance knock-outs," James Butterfill, global equity strategist at Coutts, said. "Both the inflation knock-outs remain ambiguous."
Unemployment is expected to fall slowly, with the central bank expecting it to average 7.1% in the third quarter of 2016, the end of its forecast horizon.
"The nightmare scenario for us all is that policy has to be tightened because one or other of the 'knock-outs' has been triggered before unemployment has fallen meaningfully," said Nick Beecroft, Chairman at Saxo Capital Markets.
The market was choppy throughout the day, with the FTSE 100 turning positive after the BoE report before falling later to a three-week low as investors fixed on negative elements in the statements.
The FTSE 100 closed 1.4% weaker at 6,511.21 points, the lowest since July 11, led by a sharp drop in TUI Travel , the world's top tour operator.
TUI fell 5.2% after spiking up by a fifth in the last three months to hit a record high on Tuesday and with no prospect of more bullish news on the short-term horizon.
Panmure analyst Simon French cited "an earnings upgrade which hasn't materialised". TUI said it expects to lift profits by at least 10% this year but that total bookings were down 2%, hit by weakness in Germany and France.
Among sectoral decliners, miners were hit hard. The UK mining index fell 1.5% to feature among the top decliners on the back of poor earnings and concerns about global demand for industrial metals such as copper.
Randgold Resources dropped 1.4% after the African miner's quarterly profit fell 62 percent, while Rio Tinto fell 1.5% on weaker metals prices and concerns about demand for raw materials in top consumer China.
Glencore Xstrata slid 1.9% after the mining group and JPMorgan Chase & Co were hit with a U.S. lawsuit, along with the London Metal Exchange, alleging they artificially inflated aluminium prices.
