Britain's top shares dropped on Wednesday, snapping a four-session rally, as rising bond yields for Italy and Spain and the latest poll results in Greece stoked fears about the euro zone debt crisis, sapping investors' risk appetite. The FTSE 100 index closed down 93.86 points, or 1.7 percent at 5,297.28, reversing much of the rally seen since last Thursday and putting it on course for a monthly drop of more than 7.5 percent in May, its worst performance since August 2012.
Weak energy stocks and miners were the two biggest drags on the blue-chip index, reversing a rally seen on Tuesday, as the demand picture for commodities was hit by the euro zone crisis and by fading hopes for stimulus measures from top metals consumer China.
Banks were also among the worst performers affected by euro zone debt exposure concerns, with Royal Bank of Scotland down 3.0 percent as J.P. Morgan Cazenove cut its target price to 25 pence in a cautious UK sector review. Lloyds Banking Group shed 2.3 percent as J.P. Morgan reduced its target to 30 pence from 40 pence, although it upgraded its rating to "neutral" on valuation grounds.
British banks ended off lows, however, as investors saw some cause for optimism after the European Commission said the euro zone should move toward a banking union, consider eurobonds and the direct recapitalisation of banks from its permanent bailout fund as well as boost growth and cut debt.
Any real cheer, however, was short-lived after the latest poll from Greece showed the radical leftist SYRIZA party has taken the lead over the pro-bailout conservatives ahead of a national parliamentary election next month that may determine whether the debt-laden country stays in the euro zone.
Worries over the cost of debt for Spain and Italy also caused concerns. Yields on 10-year Spanish bonds moved closer to 7 percent, a level at which other nations in the euro zone were forced to seek a bailout, while Italian 10-year bond yields topped 6 percent at a bond sale for the first time since January.
"The market was hit from all angles today ... All this news flow gave bears the perfect opportunity to push the market lower in a perfect storm of panic which is fanning the problems by causing Spain's borrowing costs to go higher," said Angus Campbell, Head of Market Analysis at Capital Spreads.
Wall Street tracked European markets lower, with US bluechips down 1.2 percent by London's close, knocked by concerns over the euro zone as well as some weak domestic data. US pending home sales unexpectedly fell 5.5 percent in April to a four-month low, knocking recent optimism that the housing sector may have hit a bottom. Severn Trent was the top FTSE 100 riser, up 2.5 percent after the water firm posted full-year profits above market expectations, with higher prices offsetting a rise in expenses and lower metered users' consumption.
WM Morrison Supermarkets also found gains, up 0.6 percent aided by upbeat comments from Galvan Research. "Despite difficult conditions, Morrison's May update was in line with its expectations, and this coupled with the ongoing share buyback and the woes of sector leader Tesco suggests to the Galvan Research team that the shares represent a buying opportunity just off the current year lows," Andrew Gibson, Head of Research at Galvan said in a note.
And food ingredients firm Tate & Lyle added 0.1 percent ahead of its full-year results due on Thursday. But overall the gloom remained undiminished, with the euro zone crisis expected to remain centre-stage for the time being. "The next month is likely to be pivotal in whether the Eurozone can continue down the path it's currently headed or if the pain being felt at the moment is merely a pinch compared to how bad it's going to get," Craig Erlam, market analyst at Alpari (UK), said in a note.
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