Early gains were soon wiped out by depressing data from the US, causing the benchmark index to end the week at 6,348.5 – down from 6,476.9 on December 31.

Worse than forecast US jobs data re-ignited fears of a recession across the pond, and sent both Wall Street and UK blue chip stocks tumbling.

High street retailers were among the greatest losers after both DSG International, the owner of PC World and Currys electrical stores, and Land of Leather issued profits warnings following another year of tough Christmas trading.

Clothing retailer Next also saw shares dropping 9% to 1464p as it warned that it was unlikely to achieve like-for-like UK sales growth over the next 12 months.

Retailers will continue to dominate the City this week with several of the big retail hitters, including Sainsbury's, due to update the markets.

Sainsbury's could provide some cheer, however, as analysts expect the food sector to have avoided some of the tough conditions seen elsewhere.

A recent trading update from Waitrose, the middle-classes' favourite, led to some optimism for Britain's supermarkets after it reported a 28.5% increase in profits over the Christmas week to £79.2m.

Although Sainsbury's is unlikely to see the same double digit growth, the City expects it to report a satisfactory 3.6% rise in like-for-like sales. Andrew Wade, retail analyst at Seymour Pierce, said he expected the supermarkets to report a "pretty solid Christmas all in all".

With the five interest rate hikes before December and banks tightening up mortgage lending in the wake of the credit crunch, analysts are expected little cheer from house builders such as Persimmon, which reports on Wednesday.

In a previous update in August, Persimmon warned of "challenging" times of ahead.

Nevertheless, analysts maintain that the company continues to have a strong balance sheet and could be one of the players in the number of mergers and acquisitions expected in the sector this year.

FTSE 250 companies Redrows, Bovis Homes and Bellways, which also report this week, have been cited as potential takeover targets by City watchers expecting consolidation.