Collapse of BHP Rio Deal Hits Miners and Dents FTSE

Britain's top share index fell 1.7% in early trade on Tuesday, dragged lower by miners as the world's biggest, BHP Billiton, dropped its hostile takeover of Rio Tinto.

The index erased some of the record gains seen in the previous session, as investors focused again on the grim economic outlook. By 08.58 GMT the FTSE 100 had fallen 72.00 points to 4,080.96 after a record 9.8% gain the previous session.

Mining stocks were the biggest fallers as the collapse of the BHP Billiton Rio deal highlighted the problems of deteriorating demand which have hammered the sector in recent months. BHP Billiton gained 4.6% on relief that it is not bidding, while Rio Tinto shares fell 36.5%.

"Miners are the biggest drag on the market, but inevitably with the market rising close to 10% (on Monday), there's going to be some profit-taking," said Richard Hunter, head of UK equities at Hargreaves Lansdown.

The World Bank said China's growth could well slow to its weakest pace in almost two decades next year, the latest grim prognosis for a global economy buckling despite the concerted efforts of policymakers.

What started more than a year ago as a meltdown in the US market for high-risk mortgages has engulfed the world, freezing access to credit, sparking bank collapses and requiring the financial bailout of entire countries.

"The fundamentals have not changed, corporate earnings still look fairly weak, so yesterday's increase should be seen as a bear market rally," Hargreaves Lansdown's Hunter said.

The collapse of the deal dented the sector as a whole with Eurasian Natural Resources, Xstrata, Lonmin and Anglo American losing between 2.6 and 4.8%.

Energy stocks also fell as oil retreated from sharp gains the previous session. Royal Dutch Shell fell 1%, BP slid 0.2%.

Financials were among the strongest gainers, adding to big gains in the previous session, with the US government's weekend rescue of the No.2 bank Citigropup continuing to ease anxiety on the troubled sector.

Man Group gained 3.5%, Lloyds TSB added 3.2%, while Barclays firmed 3.2%.

Shares in BT Group slid 4.2% after Merrill Lynch cut its rating to "neutral" from "buy" and reduced its price target, saying the telecoms company is increasingly exposed to the sharp slowdown in UK consumer and corporate spending.

Shares in Wloseley, the British plumbing and heating supplies company, fell 5.3% as RBS cut its rating to "sell" from "hold", and reduced its target price to 224 pence from 300 pence.

By Simon Falush; editing by Chris Wickham, Reuters.