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(Alliance News) - London stocks suffered heavy losses on Tuesday as escalating conflict in the Middle East drove oil prices sharply higher, stoking fears of renewed inflation and higher interest rates that weighed on equities across Europe and the US

"European markets are being hit hard, as the full inflationary impact of the war in Iran truly comes home to roost," commented Joshua Mahony at Scope Markets.

The FTSE 100 index ended down 295.98 points, 2.8%, at 10,484.13.

The FTSE 250 ended down 729.43 points, 3.1%, at 22,694.21 and the AIM All-Share closed 29.46 points lower, 3.6%, at 786.43.

The Cboe UK 100 was down 2.9% at 1,040.47, the Cboe UK 250 was 3.1% lower at 20,007.51, and the Cboe Small Companies Index declined 2.0% to 18,128.06.

New strikes were reported Tuesday across the Middle East, including Israeli bombardment on Lebanon and a drone attack on the US embassy in Saudi Arabia's capital Riyadh.

The conflict started with US and Israeli strikes on Iran over the weekend, which sparked retaliatory Iranian attacks and showed no sign of abating as it entered its fourth day.

Iran has unleashed missiles and drones across the Middle East, including at Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.

A general in Iran's Revolutionary Guards threatened to "burn any ship" seeking to navigate the Strait of Hormuz.

In European equities on Tuesday, the CAC 40 in Paris closed down 3.5%, as did the DAX 40 in Frankfurt.

On Wall Street, markets also fell heavily. The Dow Jones Industrial Average was down 1.7%, the S&P 500 index was 1.6% lower, while the Nasdaq Composite declined 1.7%.

Brent oil traded higher at USD83.06 a barrel on Tuesday afternoon, up from USD77.92 at same time on Monday.

"The longer oil and natural gas prices remain elevated, the greater the risk of a meaningful impact on inflation which could mean higher interest rates, an event that's typically negative for equity markets," observed Dan Coatsworth, head of markets at AJ Bell.

Mahony at Scope Markets explained the recent removal of insurance coverage for ships passing through the Straits of Hormuz provided an effective closure of the key shipping lane.

"While the US claims that the Straits of Hormuz remains open following the destruction of much of the Iranian Navy, the cancellation of insurance coverage and Iranian threats that ships will be set ablaze for passing through the passage mean that journeys have slowed to a trickle. This means that oil prices are likely to rise as long as this conflict rages on, with this key bottleneck proving to be one of Iran’s most important points of leverage as they seek to pressure the US President through higher inflation and destruction of key facilities for US allies in the region."

The dollar extended recent gains. The pound was lower at USD1.3305 on Tuesday afternoon, from USD1.3360 at the equities close on Monday.

The euro stood lower at USD1.1585, from USD1.1672. Against the yen, the dollar was trading slightly higher at JPY157.80, compared to JPY157.73.

In Europe, eurozone consumer price inflation surprisingly accelerated, a preliminary reading showed on Tuesday, as service price growth quickened.

Eurostat's flash reading said the annual consumer price inflation rate in the single currency bloc picked up to 1.9% in February, from 1.7% in January. The rate of inflation had been expected to remain at 1.7%, according to consensus cited by FXStreet.

The yield on the US 10-year Treasury widened to 4.07% on Tuesday from 4.05% on Monday. The yield on the US 30-year Treasury stretched to 4.71% from 4.70%.

The yield on UK-10 year gilts leapt to 4.48% from 4.30% on Monday as rising energy prices dampened hopes for interest rate cuts. Late last week, the yield had fallen to around 4.24%.

The Middle East crisis overshadowed the government's spring statement.

Chancellor Rachel Reeves told MPs the government has "the right economic plan for our country."

"I am in no doubt how great the rewards will be if we stay the course," she added.

She said the plan is even more important in a world that has, in the past few days, "become more uncertain," noting events in the Middle East.

The Office for Budget Responsibility lowered its growth forecast to 1.1% in 2026 from the 1.4% projection in November. But it raised projections for 2027 and 2028 to 1.6% from 1.5% before.

The OBR expects the government to hit its 2% inflation target this year and sees unemployment peaking in 2026.

Reeves said the OBR estimates fiscal headroom has risen to GBP23.6 billion from the GBP21.7 billion forecast in November.

Analysts at Lloyds Markets noted that relative to previous fiscal updates, the statement was "purposefully restrained", consistent with Reeves's efforts to reduce its profile as a major event.

"The geopolitical situation in the Middle East further diminished its visibility, contributing to an overall sense that the statement was a routine fiscal update rather than a significant policy moment. This approach underscores the government’s desire for stability in fiscal communications while retaining room for more substantial decisions in the autumn - the scale and direction of which are likely to depend heavily on how events in the Middle East evolve."

The OBR itself stressed events in the Middle East could have "very significant impacts" on the global and UK economies.

On the FTSE 100, Smith & Nephew led a handful of gainers, among a sea of red, on further consideration of Monday's results.

S&N rose 3.6%, with others in the green including oil major BP, up 1.1%, accountancy software provider Sage, up 0.9%, and defence contractor Babcock International, up 0.4%.

But British Airways owner, IAG, fell a further 5.4%, while easyJet fell 4.1%. On the FTSE 250, Wizz Air fell 6.5%. Travel retailer WH Smith declined 6.1%.

Fears that rising inflation will quash hopes for lower interest rates hit housebuilders with Persimmon down 6.0% and Barratt Redrow 4.2% lower.

Miners slumped as fears of slowing economic growth, and the strong dollar, hit metals prices.

Gold slumped to USD5,114.94 an ounce on Tuesday from USD5,288.00 on Monday. Silver fell 6.9% and copper 1.5%.

Fresnillo, which also reported annual results, fell 5.4%, Endeavour Mining fell 6.2%, Antofagasta fell 5.8% and Anglo American fell 3.8%.

On the FTSE 250, Keller rose 10% as it said it intends to launch a GBP100 million share buyback programme and reported higher earnings for 2025.

The London-based geotechnical specialist contractor said its results reflect "sustained improvement in operational and financial performance" helped by "geographic diversity, sector agility and resilience".

The biggest risers on the FTSE 100 were Smith & Nephew, up 47.00p at 1,360.00p, BP, up 5.15p at 493.00p, Sage Group, up 7.40p at 847.40p, Relx, up 21.00p at 2,596.00p and Pearson, up 4.20p at 958.60p.

The biggest fallers on the FTSE 100 were Intertek, down 860.00p at 3,882.00p, DCC, down 325.00p at 4,840.00p, Endeavour Mining, down 319.00p at 4,866.00p, Persimmon, down 87.00p at 1,374.00p and Antofagasta, down 243.00p at 3,915.00p.

Wednesday's global economic calendar has a slew of composite PMI readings, the Federal Reserve's Beige Book plus the ISM services PMI in the US.

Wednesday's UK corporate calendar has full-year results from insurer Beazley, housebuilder Vistry and engineering firm Weir Group.

By Jeremy Cutler, Alliance News reporter

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