The FTSE 100 ended a painful week on the back foot, with oil soaring above $90 a barrel, sending UK bond yields soaring as inflation fears grew.
A weak US jobs report added to the bearish sentiment, as European and US markets also fell sharply.
The FTSE 100 index closed down 129.19 points, or 1.2%, to 10,284.75.
The FTSE 250 closed down 199.25 points, or 0.9%, at 22,500.95 and the AIM All-Share fell 3.66 points, or 0.5%, to 784.70.
Over the week, the FTSE 100 was down 5.7%, the FTSE 250 was down 5.3% and the AIM All-Share was down 4.2%.
Brent crude oil rose sharply on Friday afternoon to $90.85 a barrel, up from $84.41 at the same time on Thursday.
The latest gains came after Kuwait joined Qatar in saying it was halting energy production, as the crisis in the Middle East deepened.
Kathleen Brooks, director of research at XTB, noted that US President Donald Trump also dismissed hopes that mediation was taking place to end this war in the Middle East, dashing hopes that conflict would be quickly averted.
Attacks on oil fields were reported in southern Iraq and the autonomous region of northern Kurdistan, forcing a US-run oil field to shut down production.
Earlier this week, Trump pledged to protect ships through the Strait of Hormuz, but shipping companies have acted cautiously in the region.
US Energy Secretary Chris Wright said on Friday that the US Navy was preparing to escort ships through the Strait of Hormuz “as soon as it is reasonable to do so.”
Iranian state television reported on Friday about a new drone attack on a ship in the strategic Strait of Hormuz, which caused a fire, on the seventh day of the war with the United States and Israel.
Bank of America said history suggests that only sharp and persistent spikes in the price of crude oil trigger persistent inflationary cycles.
“If the status quo persists, with oil prices around $15 higher than the pre-war level, we will allay concerns about (oil-induced) inflation. But an escalation that pushes oil prices persistently above $100 would be more worrying,” the bank said.
Adding to the market's woes, total nonfarm payroll employment in the US fell by 92,000 in February, data released by the US Bureau of Labor Statistics showed, well below expectations cited by FXStreet for an increase of 59,000.
January's increase was revised down from 130,000 to 126,000, while December's total was revised down by 65,000, from an increase of 48,000 to a drop of 17,000.
The US unemployment rate rose to 4.4% in February from 4.3% in January, where it was expected to remain.
Wells Fargo analysts said the data will challenge what was a growing view among Federal Reserve officials that the labor market is stabilizing, while the conflict with Iran further aggravates the outlook.
“Ultimately, the Federal Reserve can't do much to combat rising inflation due to a supply-side oil price shock. However, the inflationary impact of the conflict in Iran makes it harder to be a dove right now.
“Overall, we expect the FOMC to remain in wait-and-see mode, and our forecast for 50 basis points of rate cuts this year remains unchanged,” Wells Fargo said.
ING said January employment figures likely overstated the strength of hiring, while bad weather and strikes likely mean February figures overstated weakness.
“However, hiring remains subdued and higher energy costs will reduce purchasing power, leaving the door open for rate cuts by the Fed. But that will be a story for the end of the second half of the year,” he added.
Rising energy prices put pressure on bonds amid expectations of delays in interest rate cuts due to an expected rise in inflation.
The 10-year US Treasury yield stretched to 4.16% on Friday from 4.15% on Thursday. The 30-year US Treasury yield widened to 4.78% from 4.76%.
The movements were most marked in the United Kingdom. Britain's 10-year bond yield jumped to 4.61% on Friday from 4.48% on Thursday, after trading around 4.23% a week ago.
“Amid the current energy shock, the UK has twin vulnerabilities given a high dependence on natural gas but also a rapidly weakening labor market,” said Allan Monks, an analyst at JPMorgan.
He said a Bank of England rate cut in March is “off the table” and that April “requires a clear calming of geopolitical tensions.”
“For now we are delaying the next cut until April, but risks are already shifting towards a longer pause and a greater impact on growth,” he added.
But Barclays still expects a 25 basis point cut, although it accepts the decision is “on a knife's edge”.
“If geopolitical uncertainty does not ease, or the data comes in hotter than we expect, then the balance could easily tip towards a stalemate,” Barclays added.
In European equities on Friday, the CAC 40 in Paris closed down 0.9%, as did the DAX 40 in Frankfurt.
On Wall Street, markets also faltered. The Dow Jones Industrial Average was down 1.1%, the S&P 500 index was down 1.0% while the Nasdaq Composite fell 0.8%.
The pound rose to $1.3387 on Friday afternoon, up from $1.3309 at the close of trading on Thursday.
The euro rose to $1.1597, from $1.1574. Against the Japanese yen, the dollar was trading slightly lower at 157.62 yen, down from 157.67 yen.
Gold rose to $5,142.35 an ounce on Friday from $5,075.16 on Thursday.
Stocks making waves on Friday included IMI, which rose 2.3%.
The Birmingham-based designer of engineering products in fluid and motion control applications announced a new £500 million share buyback as it reported what it called another year of “high-quality” revenue and profit growth.
Pre-tax profits rose 27% to £419m in 2025 from £330m a year earlier, while revenue rose 4.1%, or 5% organically, to £2.3bn from £2.21bn.
Fading rate cut hopes put rate-sensitive housebuilders on the defensive: Barratt Redrow was down 2.6% and Berkeley was down 3.0%, while DIY retailer Kingfisher fell 5.2%.
On the FTSE 250, cruise operator Carnival lost another 6.4% as travel operators continued to come under pressure.
The biggest risers on the FTSE 100 were: Rightmove, up 24.4p to 466.0p; Autotrader, up 22.1p to 494.8p; BAE Systems, up 64.0p to 2,214.0p; Group 3i, up 85.0p to 3,014.0p; and IMI, with an increase of 62.0 pence to 2,814.0 pence.
The biggest fallers on the FTSE 100 were: Kingfisher, down 17.7p to 325.7p; Anglo American, down 148.0p to 3,231.0p; Airtel Africa, down 14.8p to 342.2p; Pershing Square Holdings, down 166.0 pence to 3,966.0 pence; and Marks & Spencer, down 14.1p to 364.0p.
Monday's global economic calendar includes an inflation reading in China overnight, plus the US consumer inflation expectations report.
Monday's UK corporate calendar includes full-year results from London-based shipping services provider Clarkson.
Contributed by Alliance News
