Markets' rally fades on bailout and oil blow

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Ahead of tonight meeting of the oil producers Opec in Vienna its president, Chakib Khelil, implied the organisation would not be cutting output to boost prices.

He said: "We are producing at a certain level. We will probably stay at that level."

He suggested that oil prices could stay at current levels for the "next few months". Brent crude fell $1.56 to $101.88 a barrel.

In New York shares in Lehman fell another 8% after yesterday's 13% tumble. The bank will update investors on "key initiatives" next week but fears are growing that Korea Development Bank has walked away.

At the same time the threat of a full-blown UK recession increased today after output from British factories sank for a fifth successive month.

Official figures showed manufacturing production fell 0.2% between June and July with makers of electrical goods and food products hit particularly hard.

A string of City economists said the figures, the longest run of decline for seven years, made recession ever more likely. It raised hopes interest rates will be cut before the end of the year and then aggressively in 2009.

"Once again, it's grim news for manufacturing," said Philip Shaw of Investec.

"Overall, it would tend to support our call that the economy will be in recession by the end of the year."

The Council of Mortgage Lenders said 47,000 loans were made to home buyers in July, the same as in June but 51% fewer than a year ago. First-time buyers were squeezed out of the market as lenders demanded deposits of 15%.

Meanwhile, the Royal Institution of Chartered Surveyors said sales were at the lowest level for 30 years in August with some estate agents selling fewer than one home per week.

It cast a shadow over the City following yesterday's bullish reaction to the US government's bailout of mortgage finance giants Fannie Mae and Freddie Mac.

The FTSE 100 index closed up more than 200 points last night even after trading was halted for seven hours due to a technical glitch which angered London Stock Exchange chief executive Dame Clara Furse.