Britain's blue chip index closed 1.6 percent lower on Thursday as oils and miners tracked softer commodity prices and, along with falling banks, outweighed gains in British Energy and Kingfisher. The FTSE 100 ended down 87.6 points at 5,362.3, after rising 1.6 percent on Wednesday.
The benchmark index has fallen 17 percent this year, against an average yearly gain of more than 10 percent in the previous five years. Banks slipped after early gains on a smaller-than-expected fall in the earnings of Credit Suisse, as concerns about global economic growth and financial stress continued to dampen market sentiment.
Royal Bank of Scotland, Barclays, HBOS, HSBC, Lloyds TSB and Standard Chartered fell between 0.6 and 2.5 percent. "We have had a pretty decent rally over the last week or so, it's no surprise that we were due for a correction," said Peter Dixon, UK economist at Commerzbank. "Sentiment is generally bad. Things aren't by any means over and all the factors which drove the market down in the first place are still in play," he added.
Figures painted a grim picture about economic growth and the housing market. Data showed US existing home sales fell more sharply than forecast in June and dragged the annual sales pace to a 10-year low. British retail sales took a record fall and optimism among eurozone service providers hit its lowest point in at least 10 years. Surveys of German, French and Italian businesses all came in below consensus expectations.
"This (retail sales data) is a further blow to the UK economy which is still reeling from implications of the shocking Vodafone numbers on Tuesday," David Evans, market analyst at BetOnMarkets.com said in a note.
"The buying from last week is looking increasingly like a sucker's rally as traders realise that the worst may not be behind us and may in fact appear very soon in the future." Oil firms suffered heavily as crude prices hit seven-week lows, while miners followed a sharp drop in base metals prices.
Gas producer BG Group, BP, Royal Dutch Shell, Cairn Energy and Tullow Oil shed between 1.3 and 6.3 percent. Miners topped the FTSE 100 losers list, with BHP Billiton falling 4.7 percent, Anglo American dropping 2.3 percent, Lonmin slipping 6 percent and Eurasian Natural Resources falling 6.5 percent.
Among gainers, nuclear power operator British Energy rose 6.2 percent after it said it was in advanced discussions with one party, which industry sources have said is France's Electricite De France. Kingfisher leapt more than 15 percent before closing 6.5 percent higher after Europe's biggest home improvements retailer reported a 0.2 percent rise in second-quarter sales at its B&Q chain in the UK and improved gross margins in both its UK and French businesses.
Rolls-Royce rose 0.7 percent after the British engine maker met forecasts with an 8 percent rise in first-half profit and promised more growth and a 10 percent dividend hike despite global economic conditions.
"Following cautionary comments expressed by management of Boeing yesterday, investors may well be breathing a sigh of relief given the relative optimism encapsulated within today's results," says Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers. Shares in London Stock Exchange rose nearly 3 percent after Morgan Stanley upgraded the stock to "equal weight" from "underweight" and raised its price target.