Britain's top share index slid 2.7 percent on Friday to hit its lowest closing level in nearly three years, as banks fell on fears of more capital raising and worries about a bigger tax bill weighed on Vodafone. The FTSE 100 closed down 145.2 points at 5,261.6, for a weekly loss of 2 percent - marking an eighth straight week in retreat.
The UK benchmark index on Thursday closed in bear-market territory - it is down 20 percent from a multi-year peak a year ago, and has fallen 17.8 percent so far this year.
"Earlier today, we were sitting on the same level that the market had commenced the week at and if there had been a close around that level then it would have looked like there had been a stalemate on the lows between bulls and bears, indicating that we had reached the bottom," said Angus Campbell, head of sales at Capital Spreads.
"The movement this afternoon was a clear indication that we haven't reached the bottom and the bears are still fully in control." European shares also finished the day sharply lower, while US stocks were down. Banks were the biggest losing sector on the FTSE 100 on lingering concerns over the health of US mortgage finance companies Fannie Mae and Freddie Mac. Shares in the two US financial firms slumped more than 26 percent.
US Treasury Secretary Henry Paulson gave no indication of an imminent bail-out of the mortgage providers after the New York Times said the government may take over them if their funding problems worsen. In the UK, Royal Bank of Scotland, Barclays, HSBC, HBOS, Lloyds TSB and Standard Chartered lost between 1.9 and 7.8 percent.
Index heavyweight Vodafone shed 4.7 percent after tax experts and a source familiar with the situation confirmed that the mobile phone group's potential tax bill in India could double to $4 billion if it lost a court case. An Indian court last week concluded hearings in a $2 billion tax case relating to Vodafone's purchase of a controlling stake in an Indian mobile operator last year.
Oil shares pared earlier gains despite crude prices hitting a record high, which stoked inflation fears. Miners were also weaker, with Vedanta Resources, Rio Tinto, Xstrata, Antofagasta, Anglo American and BHP Billiton all down.
"With the FTSE 100 touching lows not seen since October 2005, it's clear that the markets are suffering a difficult time and are in desperate need of some stability," Tim Hughes, head of sales trading at IG Index, said in a note.
"Negative sentiment is stemming from a combination of factors; spiking oil prices and the inevitable slowdown in the UK economy are like an unstoppable tide rolling in on the markets, and there seems little sign of any sustained resurgence to counter the negativity and send the FTSE 100 back up again." British Airways dropped 1.8 percent as traders said higher oil prices were weighing on the stock.
Retailers also took a beating after John Lewis reported a 1.3 percent fall in weekly sales at its department stores, the eight decline in nine weeks, but said its clearance sale was doing well in a tough market. Marks & Spencer, Kingfisher and Next were off 4.9 to 7.3 percent.