Jitters in the financial sector prompted by tough new proposed regulations sent banks sliding on Thursday while commodity stocks also retreated on weaker raw material prices, pulling the FTSE 100 down 1.9 percent by close. The FTSE 100 closed down 102.65 points at 5,217.61, having closed 34.49 points, or 0.7 percent, higher on Wednesday at 5,320.26.
However the blue chip index is still up 51 percent from a six-year low in March. Banks were the biggest drag on the index on Thursday as investors sold the sector on concerns that new rules proposed by the Basel Committee on Banking Supervision will mean big banks will have to set aside more profits or even raise capital as protection against hard times.
"It's right to be cautious on banks as prospects for their profitability are going to be limited by the increasing amount of regulation," said Peter Dixon, economist at Commerzbank. Barclays, HSBC, Standard Chartered, Royal Bank of Scotland and Lloyds Banking Group fell 3.5 to 8.1 percent.
The banking sector extended losses after Citigroup got a cool reception for its stock offering which received a much lower price than expected, prompting the US Treasury to delay a plan to sell its stock in the bank. Retailers were hit after British retail sales fell unexpectedly in November. Home improvements retailer Kingfisher, electricals retailers DSG International and Kesa Electricals, and clothing-to-foods group Marks & Spencer fell 0.5 to 3.6 percent.
Home Retail was down 4.2 percent, also impacted by a downbeat note from Credit Suisse saying that structural concerns and price falls at its Argos chain could place pressure on gross profit margins. Figures from the Office for National Statistics showed sales dropped at their fastest pace since May after department stores and clothing retailers failed to repeat October's strong sales.
Miners and energy stocks were also weaker as the dollar surged to three-month highs after the Federal Reserve comments on the US economy, hitting commodity prices. Miners were in reverse, having notched up good gains on Wednesday as metals prices dropped, with gold falling 3 percent in European trade. Antofagasta, Xstrata, Lonmin Eurasian Natural Resources and Kazakhmys were down 3.4 to 5.2 percent.
Energy stocks fell as crude dipped 1.6 percent, with BG Group , BP, and Royal Dutch Shell down 0.2 to 1.5 percent. Pharmaceutical stocks were also lower, with Shire a top blue chip faller, off 1.6 percent, as UBS cut its rating on the stock to "neutral" from "buy", mainly on valuation grounds.
GlaxoSmithKline fell 1.7 percent and AstraZenca was off 0.9 percent. On the upside, Rentokil Initial was the top riser ahead of its relegation from the FTSE 100 next week, up 1.4 percent, building on gains made Wednesday when Deutsche Bank hiked its target price and estimates for the support services group.
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