Mark Carney's warning that interest rates may have to rise as soon as this year led to a sharp fall in housebuilding and retail stocks.

Airline stocks were also under pressure on fears that a surge in oil prices caused by ongoing fighting in Iraq will be reflected in their fuel costs.

The developments meant risk-weighted stocks were firmly out of favour as the FTSE 100 Index slid nearly 1% or 65.3 points to 6777.9.

Loading article content

In his annual Mansion House speech, the Bank of England governor warned that the time for an increase in borrowing costs was fast approaching.

His remarks sent the pound surging close to 1.70 US dollars, a level not seen since 2009, while it also reached a 19-month high against the euro. Analysts had previously been expecting the first hike in spring next year.

Confidence in the housebuilding stocks was badly shaken by Mr Carney's rates message, with Persimmon off nearly 7% or 91p lower at 1211p and Barratt Developments down 23.3p at 346.3p.

Home improvement chains were also impacted as B&Q owner Kingfisher fell nearly 4% or 15.2p to 369p and Wickes firm Travis Perkins dipped 42p to 1628p.

Elsewhere in the retail sector, Sports Direct International dropped nearly 5% or 39p at 779p and Next eased 175p to 6250p.

The fear for investors is that higher interest rates will provide more stimulus for sterling at a time when many retailers are already complaining about its effect on overseas earnings. ASOS, which recently said profits would be lower than expected due to the pound's strength, was more than 5% or 160p lower at 2919p.

Investors also dumped travel and airline stocks after oil prices surged to a nine-month high on fears that insurgent victories in Iraq could disrupt global oil supplies.

Iraq is the second largest producer in the Organisation of the Petroleum Exporting Countries. Production has increased by a fifth since 2011 to reach 3.3 million barrels per day.

The increase in oil prices added to a difficult week for the airlines sector after profit warnings from Lufthansa and Aer Lingus.

British Airways owner International Airlines Group fell more than 3% or 12.2p to 379p and easyJet dropped 44p to 1457p. Holiday companies TUI Travel and Thomas Cook were down by 11.1p and 9.7p to 391.9p and 140p respectively.

In contrast, BP rose 0.8p to 507p though Tullow Oil slipped 0.5p to 841.5p at the top of a shortened FTSE 100 risers board.

The biggest FTSE 100 risers were Fresnillo up 9p at 807p, Admiral Group up 16p at 1551p, G4S up 2.1p at 257p and United Utilities up 6.5p at 893p.

The biggest FTSE 100 fallers were Persimmon down 91p at 1211p, Barratt Developments down 23.3p at 346.3p Sport Direct International down 39p at 779p and Land Securities down 47p at 1028p.