The FTSE 100 fell sharply in afternoon trading as rising interest rate expectations weighed on sentiment.
The FTSE 100 has now slipped into negative territory for the year, as the fallout from the Iran conflict wipes out earlier gains.
The index fell 146 points, or 1.46%, to 9,917, dropping below its year-end 2025 closing level of 9,931.38.
The reversal marks a sharp shift in sentiment. Before the conflict began, the blue-chip index had been trading at record highs above 10,900, with expectations it could soon break through the 11,000 mark.
Investors are increasingly betting that central banks will need to tighten policy to counter inflation driven by higher oil and gas prices. Money markets are now pricing in three rate hikes from the Bank of England this year, alongside a 50% chance of a rate increase by the Federal Reserve.
Kallum Pickering, chief UK economist at Peel Hunt, warned that the economic impact of the conflict could be deeper and longer-lasting than expected.
He said rising expectations of a prolonged war are pushing global interest rates higher, as markets anticipate tighter monetary policy to combat inflation.
Pickering added that damage to Middle Eastern energy infrastructure will take time to repair, meaning the global economy is likely to face persistently higher energy costs and supply shortages for months to come, even if the conflict were to end quickly.
