Renewed fears about the financial sector hammered leading insurance groups, with investors increasingly worried about the insurance world's exposure to corporate debt, especially bank bonds.

Old Mutual was worst-hit, down 4.8p at 52½p, with Norwich Union owner Aviva off 20¼p at 262¾p, Legal & General 4p lower at 54.8p and Prudential 31p adrift at 275½p. Insurance companies have been huge buyers of bank-issued bonds, and the worry is this debt is rapidly approaching junk status, particularly in the light of further nationalisations.

Sentiment in the sector was not helped by rumours of short-selling although the only position disclosed today was by Cazenove Capital Management. It admitted taking a short position in subprime lender Provident Financial, down 5p at 787p. The Pru was the subject of vague rumours it may be planning a rights issue to fund the acquisition of AIG's Asian assets.

With the UK now officially in a recession, the need for fresh funds is worrying the market. Leading bankers suggest corporates will need to raise about £30 billion from the equity markets this year in order to stay afloat.

Plumbing supplies group Wolseley, down 16p at 281p, is likely to tap shareholders for £400 million as early as next week while other companies in the running for more funds include Premier Foods, Debenhams, Lloyd's insurer Chaucer and the leading property developers. Land Securities was off 46.5p at 618p while rival British Land shed 8½p to 378¾p.

Barratt, 10p lower at 69½p, suffered as Citigroup predicted it will be forced to make a major equity issue, leading to "large-scale dilution to existing holders". It believes the builder will have to renegotiate its bank covenants again, and has downgraded the shares to sell from hold, slashing the target to 50p from 80p. Chaucer, off 1p at 41p, is said to be looking at a £100 million equity issue after high claims and poor investment returns.

The coming results season may well see a flurry of equity listings tacked on to scheduled announcements, and the knowledge that dozens of other companies plan to ask shareholders for money may encourage some to bring forward their plans before investors are swamped. New regulations are coming into force that, in an effort to stem volatility during an offer period, will cut from three weeks to two the time investors have to decide on an offer.

In London, official confirmation of recession set a dark mood for the market. The FTSE 100 index slipped below 4000 for the first time this year, with investors now worried about how deep the downturn will be. As the index fell 54.63 points to 3997.6, just a handful of major names made headway as investors sought refuge in classic recession-proof stocks.

JPMorgan advised clients that UK food retail is "perhaps the safest place to be", and suggested Morrisons, 6¼p stronger at 259p, will win out over Sainsbury's. In the wake of Morrisons' mouthwatering results, JPMorgan has lifted its target to 320p from 310p and kept the supermarket at overweight.

However, Sainsbury's, 8p higher at 308½p, was the FTSE 100 top performer with Tesco, 3.1p ahead at 353p, trailing its rivals. Utility groups and tobacco companies were also among the risers. AstraZeneca, gaining 38p to 2818p, attracted attention, too. Some traders detected merger hopes, pointing to a hot story from the US that Pfizer was in talks to buy rival Wyeth. Others felt it was part of today's defensive drift.

Barclays slid 10.4p, or 17%, to 48.8p as chief executive John Varley's widely reported assurances that he is controlling "the conditions which support the share price" failed to convince.

Miners were on the back foot, with Nomura turning sour on three of the biggest. BHP Billiton, cut to neutral from buy, was off 44p at 1118p and Anglo American, also reduced to neutral, was 26p lower at 1243p while Rio Tinto, now rated reduce instead of neutral, dipped 50p to 1486p.