Federal Reserve's decision not to raise rates

The US central bank made it clear that worries about the global economy had influenced its decision to keep rates on hold.

"The outlook abroad appears to have become less certain," said Fed chair Janet Yellen, at a news conference.

 

At lunchtime, the UK's FTSE 100 was down 66.66 points, or 1%, at 6,120.33.

Bigger falls were seen elsewhere in Europe, with Germany's Dax index down 2.5% and France's Cac 40 dropping 2.6%.

Markets could now face a prolonged period of uncertainty as to the direction of US interest rates.

"Speculation will now shift to December as the next most likely month for US rates to start rising," said Chris Williamson, chief economist at Markit.

"The 'data dependent' Fed will want to see further robust non-farm payroll growth between now and then as well as indications that the pace of economic growth is not wilting under the pressure of China's slowdown."

Chris Beauchamp, senior market analyst at IG, said: "There are two crucial things to note in the accompanying statement [from the Fed].

"First, the US central bank is responding to global concerns, especially in emerging markets and China. Recent turmoil there underlines the fragility of the situation, and US policymakers are alive to the risks this poses to the US.

"Second, they have revised down their growth and inflation expectations, a signal that they are concerned that all is not well with the US economy either."

In London, banking stocks saw some of the biggest falls, with Royal Bank of Scotland down 2.6% and Barclays dropping 2.1%.

On the currency markets, the pound rose 0.35% against the dollar to $1.5646, and was up 0.4% against the euro at €1.3684.

Following the Fed's decision the dollar fell sharply against the yen, dropping below the 120 yen mark. The move hit shares in Japan - particularly among exporting firms - and the country's Nikkei index closed down 2%.