CITY traders panicked yesterday as bomb blasts shook London.

The FTSE 100 plunged by more than 200 points but recovered later in the day, closing down 71 points.

Some economists predicted that the Bank of England could move to cut rates in coming days if the attack had a serious impact on the Footsie and sterling.

The London Stock Exchange remained open but took action to stabilise the market, including asking traders to switch off certain electronic trading systems.

At the same time, investment banks evacuated buildings near areas where bombs went off.

The Bank of England continued its monthly rate-setting meeting as planned yesterday, when it kept the cost of borrowing at 4.75 per cent - despite pressure from manufacturers, business, retailers and home owners to cut rates.

But last night, Jonathan Said, economist at the Centre for Economics and Business Research, believed it was still possible the Bank of England's Monetary Policy Committee (MPC) could meet in the coming days, as it did following the September 11 terrorist attacks.

He said: "If the impact on the FTSE, and more importantly, the pound worsens, the bank may consider cutting rates so as to prevent additional negative pressure upon the UK's consumer slowdown."

But Simon Rubinsohn, chief economist at fund manager Gerrard, said a rate cut next month was still possible, but said it was unlikely the bank would want to create an impression of panic by cutting rates before then.

"Such a move would have indicated how powerful these sorts of attacks can be on the economy," he said.

Investment bank UBS evacuated its office near Liverpool Street, but continued trading from its other four sites in the capital, while staff at Dresdner Kleinwort Wasserstein and Goldman Sachs were advised to stay indoors until further notice.

The Footsie recovered as police and emergency services gained control of the situation in the afternoon.

Reassurance also came from New York, where the Dow Jones Industrial Average opened only marginally lower.

In London, shares in hotel operators and airlines were under the most pressure as investors worried about the impact on people's willingness to travel.

Investment was switched into traditional safe havens, such as government bonds.

Steven Saywell, senior currencies strategist at Citigroup, said: "As far as markets are concerned, it is the uncertainty that will trouble people.

"Obviously, it is a nasty incident and markets would look to know more about who was behind it - the wider situation and whether we can we expect more of this.

"We have seen buying of currencies, such as the Swiss franc, and because the attacks happened in London, the pound has suffered on the back of that."

Banks closed a number of their branches in central London as a precaution.