FTSE: 5,870.08 (–125.93) Mid-250: 11,490.75 (–188.49) Small-Cap: 3,238.35 (–38.56):SHARES IN London dropped sharply in afternoon trade after Standard Poor's lowered its outlook on the long-term rating of US sovereign debt.

The rating agency affirmed its triple A credit ratings on US sovereign debt but said that due to the country’s rising deficits and the government’s inability to reach an agreement on addressing them, its outlook on the long-term rating was revised to negative from stable.

Analysts said that SP’s had previously warned that the US’s top rating could be at risk and that its move was probably timed to follow the International Monetary Fund’s warning on the country’s budget deficit last week.

Stocks have rallied overall since the shock of the devastating Japanese earthquake just over a month ago, in spite of the ever present likelihood of further monetary tightening from Beijing.

On Sunday the People’s Bank of China further raised the reserve requirements of its country’s big banks to help rein in lending and curb inflation. The move had been widely expected by investors.

“Ongoing problems including Europe’s sovereign debt problems, post-earthquake woes in Japan and the Middle East and north African unrest have eroded risk appetite. Another worry concerns monetary policy responses to escalating inflation which could hinder global growth,” wrote Gerard Lane at Shore Capital.

Financials were among the worst hit and Barclays lost 3.6 per cent to 291p. Resolution, the insurer, fell 4.8 per cent to 294.9p after UBS downgraded the stock to “neutral” from “buy”.

The broker said the outlook for Resolution’s operational performance was clouded by its last three acquisitions, with Friends Provident’s life business not improving substantially, while Axa UK’s performance deteriorated in the fourth quarter.

There were losses for other insurers too, with Aviva off 4.6 per cent to 415p and Legal and General slipping 3 per cent to 116.6p.

Miners added to the misery as Anglo American shed 5 per cent to £29.84, while Antofagasta lost 5 per cent to £13.05.

Smith Nephew, the maker of artificial hip joints and other medical devices, fell 3 per cent to 676p after Synthes, its Swiss rival, said it was in talks with US group Johnson Johnson, previously seen as a potential buyer of the UK company. – (Copyright The Financial Times Limited 2011)