Hopes of further US interest rate cuts this week helped London's FTSE 100 Index to cut its losses yesterday in another turbulent session for investors.
London's leading companies lost almost three per cent at one point, after sales of new homes in the US dropped by a record 26 per cent in 2007 - with prices at their weakest for 16 years.
But traders then bet that the gloomy data would prompt more rate cuts from the US Federal Reserve tomorrow to follow the 0.75-point reduction made by policymakers last week in a bid to avert the world's largest economy slipping into recession.
At the beginning of a second week of stock market turmoil, the Footsie - more than 160 points lower at one point - eventually closed 80.1 points down at 5788.9, a fall of 1.4 per cent.
CMC Markets dealer Jimmy Yates described the US housing figures as "nothing short of a disaster".
"Some may have thought that the worst of the volatility was now behind us after last week's turbulence, but such assumptions are increasingly looking as if they may be rather optimistic," he added.
Wall Street's Dow Jones Industrial Average, which saw another major sell-off on Friday night - later limped into positive territory after early losses as the rate cut speculation strengthened, despite fast food giant McDonald's revealing US sales hit by "softer consumer spending".
In London, the early mood was set by major overnight falls in Asian markets led by lingering pessimism over the global economic outlook.