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The FTSE 100 dropped 2.9 per cent on opening, while the mid-cap FTSE 250 shed 2.4 per cent, reports the Financial Times.
Matt Buckland of CMC Markets commented: "The fact remains that since the lows at the start of last week, equity markets have put on some solid gains so there's plenty of scope for booking some profits."
A recent Reuters survey found that ten out of 62 economists forecast an interest rate cut of one per cent.
Howard Archer, chief UK and European economist at HIS Global Insight, said the sharp drop in house prices reported by Halifax has given the central bank an even greater incentive to lower interest rates.
This is Money reports that Bank of England's monetary policy committee is under increased pressure to boldly cut interest rates.
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