Meagre US jobs growth and near record oil prices rocked UK blue chips on Friday, dragging the FTSE-100 to its lowest close in a week, but banking stocks rose on speculation of a bid for Barclays.
Britain's third-largest bank rallied 3.9 percent to 511 pence, but closed below the day's high of 535p - supported by market talk that US financial services titan Citigroup would bid up to 700 p a share for Barclays.
Both companies declined comment.
British Airways was the day's top casualty, losing 6.1 percent to 216.4p as investors worried about the impact of rocketing jet fuel prices on the airline, which reports quarterly results on Monday.
The FTSE ended 75.5 points, or 1.71 percent weaker, at 4,337.9, shedding all the gains made this week.
US employers added a paltry 32,000 workers to payrolls in July - widely undershooting economists' forecasts for a rise of 228,000 - and the Labour Department cut its tally of job growth for May and June by a combined 61,000.
Interest rates will be a main focus for markets next week.
"Everybody will be cautious ahead of the Fed rate decision next week and the market trend looks down," said Camilla Vasa, a market analyst at Financial Spreads.
The US Federal Reserve holds its next interest rate policy meeting on Tuesday, and many economists, though disappointed by the employment report, still expect a quarter percentage point increase.
The Fed had hiked rates at the end of June, the first increase in four years.
High oil prices also weighed on market sentiment, with US crude futures staying at $44 a barrel on heightened concerns about possible disruption of supplies from Russian oil major Yukos.
The banking sector, which makes up around a quarter of the FTSE blue chip index, lent some support to the market.
Bank stocks seen as potential targets such as Lloyds TSB and Bradford & Bingley, were up 0.9 percent and 0.84 percent respectively.
Take-over speculation has gripped UK banks since Spain's Santander Central Hispano agreed a bid for Abbey National of around 8 billion pounds last month.
Turnover in Barclays of nearly 227 million shares was more than treble its average daily volume.
Strategists expect the markets to drift.
"The UK market is not wildly expensive, especially when compared to bonds," said Tim Rees, director of investment strategy at Insight Investment.
"But it goes back to the issue that a number of institutions have thought for some time that it's better to sit with slightly larger cash positions and this kind of uncertainty supports that view in what is a notoriously thin summer market."
The insurance sector will attract attention next week with results due from Old Mutual and Royal & Sun Alliance.
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