Traders expecting a sleepy summer's day on the stock market received a rude awakening yesterday as economic statistics, a volatile Wall Street, and a sharp fall in sterling gave investors plenty to think about. The FTSE 100 index started the day with a 21.8 point loss and that turned out to be the best level of the session. On two occasions, Footsie dropped below 5,000.

Early in the day, the robust state of the UK economy was highlighted when unemployment fell by a bigger than expected 49,800 in July, but the annual rate of average earnings growth remained at 4.25 per cent, indicating the tighter jobs market was not yet leading to wage pressures.

The Bank of England's inflation report was largely as expected but did remind investors that interest rates, rather than reaching the peak for this cycle, had merely paused.

But the main market-moving themes came from overseas. A warning about inflationary trends from the Bundesbank, raising fears of a rise in German interest rates, combined with some rumours of a delay in European monetary union, sent the deutschmark higher. Sterling dropped four pfennigs to DM2.89 and has shed 16 pfennigs in a week.

The deutschmark's strength did not help sentiment on Europe's bourses, which were sharply lower yesterday with the Amsterdam market losing more than 4 per cent. There was also considerable anxiety ahead of publication of US figures on producer prices and retail sales.

After what seemed to be an initially favourable reaction to the US data, with the Dow Jones Industrial Average up 76 points early on, Wall Street quickly lost ground, with the Dow slipping to a 75-point loss. That drove Footsie down to its lowest level of the day, off 81 at 4,994.8.

A rebound on Wall Street then took the Dow to a small gain by the time London closed, but that was insufficient to provide much reassurance for Footsie, which ended 72.2 off at 5,003.6.

Nervousness about the health of Wall Street has been exacerbated in recent days by the Dow's 156point drop on Friday and its 101point decline on Tuesday. "The Dow has tended quickly to recover from its bad days in the past," said Mr Bob Semple, UK strategist at NatWest Securities. "People are nervous and another bad day for the Dow would make them more nervous."

Smaller stocks, no doubt helped by sterling's decline, continued their recent outperformance against the Footsie. The SmallCap index actually rose on the day, gaining 5.5 to 2,234.3, while the FTSE 250 limited its loss to 23.4 points, ending at 4,677.