BLUE chip shares plunged back into the red yesterday as the stock market's short-lived rally came to an end amid lingering concerns of a recession on both sides of the Atlantic.

The FTSE 100 Index closed down 130.8 points at 5609.3 - a two per cent drop - wiping out nearly all of the gains made in Tuesday's rebound after US rates were cut.

The top flight index opened more than 100 points higher yesterday morning as investors were buoyed by the US Federal Reserve's surprise move to cut interest rates in an effort to avoid recession.

But minutes of the Bank of England's latest rate-setting meeting put an end to hopes that it may follow suit after they revealed that the outlook for inflation had "worsened markedly"

amid soaring oil and food costs.

That dampened hopes that the bank will be able to cut rates as sharply as the Fed to bolster the economy, leading also to fears over its ability to stave off recession.

Stocks were hit further as the Dow Jones Industrial Average plummeted by more than 200 points at one stage in early trading as markets doubted that the US cuts would be enough to prevent a recession.

In London, oil firms BP and Royal Dutch Shell were among those to suffer, closing with four per cent and six per cent falls respectively.

International financier George Soros, who made one billion US dollars betting on the devaluation of the pound on Black Wednesday in 1992, told the BBC Radio 4 Today programme that it would be very difficult to avoid'' recession in the US and the UK.

Bank of England Governor Mervyn King warned that it faced a difficult balancing act'' between controlling inflation and preventing recession.

He said: The next year will pose economic challenges for all of us - more so than at any time since the Bank of England was given its independence in 1997.'' Fears over a recession in the US have sent shockwaves through global stock exchanges since the beginning of the week, with £77bn being wiped off London's leading shares on Monday.

Analyst Anthony Platts, an assistant director at investment firm Wise Speake's Teesside office, said that fresh interest rate cuts would boost the London market, but the volatility could still continue.

He said: "When you are talking about the FTSE 100, you have companies who, because of their size, are global players and, regardless of what the Bank of England does, they cannot escape what is happening elsewhere in the world."

Mr Platts said ordinary people should also worry about the value of shares falling on the stock market.

He said: "If you work for a plc, for instance, that company needs to raise capital through the stock market, which is an important part of their business.

"If that capital is hard to come by, it puts a squeeze on the business and affects jobs."