Britain's top shares ended at a three-week closing low on Thursday, pressured by hefty falls in the banking sector as concerns over Dubai's ability to pay its debts took a toll on confidence. The FTSE 100 ended down 3.2 percent, or 170.68 points, at 5,194.13, its lowest close since Nov. 6, and losses on the day represented the biggest percentage drop in eight months.
The index is still up 50 percent since a low in March. Earlier in the session, trading on the index was halted for more than three hours mid-morning following a technical glitch at the London Stock Exchange.
Banks were hit hard as the health of the global financial system came into doubt again after Dubai said two of its flagship firms planned to delay repayment of billions of dollars of debt. Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered fell 4.8 to 8 percent.
-- LSE faces technical glitch for more than 3 hours
"It's the timing and the manner of the announcement (from Dubai) which has really upset people and has really worried investors," said David Morrison, market strategist at GFT Global. Volumes, however, were relatively thin and lacked direction as US markets were closed for the Thanksgiving holiday. "We're dealing with a very thin market here ... the losses have been exacerbated somewhat by the Dubai news," he added.
Miners were weak as the sector reacted to a drop in metals prices as concerns over the fragility of the economic recovery grew. Anglo American, Antofagasta, Fresnillo and Kazakhmys, BHP Billiton and Lonmin shed 4.2 to 6.4 percent. BHP Billiton dismissed talk on Thursday that rival Rio Tinto was baulking at a proposed $116 billion joint venture in iron ore, insisting the two were close to a binding agreement.
A fall in crude prices, which hovered around $76 a barrel, added to weakness in energy stocks. BG Group, BP, Royal Dutch Shell and Tullow Oil shed 2.4 to 3.6 percent. Among individual stocks, London Stock Exchange, in which Borse Dubai has a large stake, dropped 7.4 percent. Legal & General Group shed 7.4 percent, leading the insurance sector lower, as Citigroup cut its rating for the stock to "sell" from "hold" in a sector review.
Bucking the trend, water companies rallied after Thursday's final price determination review from industry regulator Ofwat, which allayed fears they would have to make big cuts to their charges to customers. Severn Trent and United Utilities were among the only gainers on the index, putting on 3.8 percent and 0.4 percent, respectively.
"In amongst all the uncertainty, there was a small oasis of blue as the water regulator Ofwat said that water companies will have to cut bills in real terms between 2010 and 2015, though not by as much as it previously proposed," said Michael Hewson, analyst at CMC Markets.
On the economic front, British retail sales rose at their fastest pace in two years in November, and retailers expect a further rise next month. Meanwhile, UK house prices have likely bottomed but will only creep higher over the next couple of years as more properties come on the market and the economy makes a plodding return to growth, a Reuters poll said.