The 25 basis points increase in British interest rates to 7.5 per cent hit the London equity market hard, and was described by dealers and strategists as a real surprise. But the damage to share prices proved remarkably slight at the end of a tense trading session.

The FTSE 100 index ended the day 37.6 off at 5,860.8, well above its worst level of 5.820.8, down 77.6. In the afternoon, dealers adopted a rather sanguine view. "It was a real shock, one of the worst we've had in recent weeks, but the market coped exceptionally well," said a senior salesman from one leading stockbroker. "The view around the market is that although we've got worries about the impact of the rate rise, we've also got the prospect of much more merger and acquisition activity as a counterbalance. My fancy is that we'll do nothing more than hold in the 5,700 to 6,000 range with the chances that a couple of FTSE 100 bids will drive the index clear of 6,000." He cited news of a bid approach for Vaux Group, the Sunderland-based brewer, as a classic example of the takeover frenzy that has encompassed the British second-line and smallcap stocks.

Other traders pointed out that the interest rate news tended to choke off demand for the leaders, but not for the market's second-liners and the smallcaps, although he insisted that trend might not last much longer if the market continued to slide.

He also pointed out that the Footsie and FTSE 250 had tended to converge recently, the leaders coming off and 250 moving ahead. That trend usually reverses when the levels of the two indices meet.

The FTSE 250 index settled 1.2 firmer at 5,921.6, a new record closing high, having touched an intra-day peak of 5,934.5 at midday.

The FTSE SmallCap, meanwhile, finished 1.8 off at 2,767.3, off its worst, but always in negative ground.

Discussing the decision by the Bank of England's monetary policy committee, Mr Richard Jeffrey, the Charterhouse group economist who has been one of the market's interest-rate hawks, said "given the impact of a 25 basis points rise, we should assume there will be further increases, possibly to 8 per cent".

"The delay in tightening policy led to worries that a hard landing is much more likely, with all the worries that brings for the stock market."

The fears of a hard landing were also mentioned by Mr David McBain, at the strategy team at BT Alex Brown. He said the rate rise "was a big surprise; the feeling is that this is the last rise in the current cycle but everyone said that last month. This will do little for corporate profitability. It adds to the pressure on the already labouring manufacturing sector. The earnings story is now much cloudier."

Turnover in equities was 824.5 million shares, with the institutions said to be holding off from trading stocks until the US non-farm payroll data is released this afternoon.

Some market observers fear a strong employment report could trigger a rate rise in the US after the next meeting of the US Federal Reserve's open market committee, scheduled for the end of the month.

Meanwhile, Railtrack's shares built on record highs as dealers predicted bumper profits from its deal to build the Channel Tunnel rail link.

Shares in the Government's new friend blazed northwards at express speeds, steaming 74p ahead to £13.84.

National Express, tipped to be involved in the running of trains on the rail-link service, improved 4 1/2p to £11.13 1/2. But its rumoured marketing partner, British Airways, fell 2p to 652p.

Glass group Pilkington announced its restructuring plans had cost more than it had previously announced last year but the strategy was cutting a bigger-than-expected swathe through its overheads. The group fell 7p to 135 1/2p as its £100 million losses for the year came in at analysts' expectations. Boots' profits improved by 3.2 per cent and the results thrilled investors who saw shares rise 28 1/2p rise to 984p.