UK banks lopped the most points off the FTSE 100 index after Fitch said the outlook for US banks could deteriorate if the euro-zone’s debt crisis is not resolved quickly.
The result of Spain’s bond auction, where the country paid the highest average yield since 1997, also put pressure on the market.
Fitch warned that it may reduce its “stable” rating outlook for US banks with large capital markets businesses due to contagion from the problems in European markets.
“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for US banks will darken. The risks of a negative shock are rising,” Fitch said.
The UK benchmark fell 70.17 points, or 1.3 percent, to 5,438.85 by 0958 GMT, having closed down 0.2 percent on Wednesday, after a rollercoaster session in which it swung through more than 110 points.
The market focus remained firmly on the euro zone debt situation, with sovereign bond yields in the region rising, but broadly positive UK corporate earnings news did offer investors some respite.
Rexam firmed 4.6 percent, the top blue-chip gainer, as Europe’s largest drinks can maker reported an in-line update and says it is considering selling its personal care packaging business.
Oriel Securities maintained its “add” rating on the stock citing valuation grounds.
Commodities group Glencore International was the second-biggest riser, ahead 2.1 percent, after it said trading in its marketing arm remained “solid” over the third quarter despite economic uncertainty.
British outsourcer Serco, meanwhile, reiterated its full-year guidance in the face of austerity in the UK and United States, prompting Shore Capital to upgrade its rating to “buy” from “hold,” and helping its shares 1.5 percent higher.
“Individual company reporting seem to be reasonably good, and there is value out there, but fund managers, as we’ve seen, are very reluctant to commit to this market at the moment,” Martin Dobson, head of trading at Westhouse Securities, said.
Swiss & Global Asset Management’s Stefan Angele said he did not see how the sovereign debt crisis could be solved without a long period of deleveraging and reducing entitlements in the public sector.
“This will not happen without pain, protests, political turmoil and will be an additional drag on economic growth,” Angele, head of investment management at Swiss & Global Asset Management, which has around 80 billion Swiss francs of funds under management, said.
“As a consequence, this will be a companion for financial markets for the next couple of months and even years.”
Andrew Bell at money manager Witan, meanwhile, said: “If the gathering collapse in European bond markets is not arrested, then the economic damage will be greater than equities are discounting.”
However, Bell, chief executive of the 1.1 billion pound Witan Investment Trust, added: “Growth outside the euro zone is holding up better and global monetary policy is easing, so I am focused more on medium term value in markets than the European cow pat at my feet.”
Retailers came under renewed pressure following a profits warning from French Connection, sending its shares 22 percent lower, and downbeat results from Mothercare, off 3.6 percent.
SuperGroup dropped 7.2 percent, while Home Retail shed 0.5 percent, having felt the heat on Wednesday after a profit-warning from Game Group.
British retail sales, however, got a surprise lift in October, as early pre-Christmas promotions helped drive up volumes at their fastest pace since June, official data showed.
Consumer morale in Britain, meanwhile, fell to a record low in October as fears about the euro crisis, rising unemployment and the state of the economy knocked confidence, a monthly survey by mortgage lender Nationwide showed.
