Britain's top share index slid 1.5 percent on Thursday on fears of more credit market ructions and as the euphoria of this week's central bank cash injection wore off, while record oil prices added to investor gloom.
The FTSE 100 ended down 84.0 points at 5,692.4, but well off its day's low of 5,628.9 after credit rating agency Standard & Poor's said an end to subprime-related writedowns was now in sight for large financial institutions.
Banks led the decline, all falling as investors feared the sector would suffer further fallout due to degradation in credit markets. Barclays shed 2.2 percent, Royal Bank of Scotland lost 4.6 percent, HSBC dropped 2.3 percent and HBOS slipped 2.8 percent.The UK benchmark index gained 2.6 percent in the previous two sessions on the move by the US Federal Reserve and other major central banks to unlock strained credit markets, but is still down more than 11 percent for the year due to spiralling fears of a US recession.
"We are working up towards March 18 (the Fed's next rate-setting meeting), and a Fed cut will not be enough," said Howard Wheeldon, senior strategist at BGC Partners. "We might be talking about Fed supporting another collateral based action and certainly the $200 billion we have seen this week may need to be $400 billion, or even $600 billion. Fear is breeding on itself. It's all about fear."
Europe shares also ended down but pared losses, while the US dollar plunged below 100 yen for the first time in over a decade and hit a record low versus the euro.
Miners also suffered on slowing global demand, despite US gold futures hitting a $1,000 an ounce. BHP Billiton, Rio Tinto, Anglo American and Lonmin were down between 0.6 and 1.9 percent.
Kazakh copper producer Kazakhmys dropped 2 percent after saying it had received no take-over proposal from rival Eurasian Natural Resources, which said the day before it had held preliminary talks with the Kazakh miner. Kazakhmys soared 20 percent on Wednesday.
Xstrata outperformed the sector, up 1.8 percent on market talk that Brazilian mining group Vale had clinched a deal to buy commodity trader Glencore's stake in Xstrata at 42 pounds a share.
Oil shares fell, despite crude prices hitting $110 a barrel. BP shed 2.1 percent and Royal Dutch Shell slipped 1.3 percent. British Airways and easyJet both were down nearly 5 percent on concerns over higher oil prices. Unilever advanced 3.2 percent after rival Nestle surprised investors by raising its outlook, saying the year had started strongly and it expected growth in 2008 to be similar to last year.
Bid talk in Scottish & Southern Energy, which rose 2.5 percent, boosted the utility sector. International Power gained 0.5 percent, United Utilities put on 0.7 percent and National Grid added 1.6 percent. British building products retailer Wolseley dropped 6.3 percent and hit a record low after Goldman Sachs downgraded the stock to "sell" from "neutral" and cut its price target. Traders also said ABN Amro had downgraded the stock to "sell" from "hold".