Jitters in the financial sector prompted by tough new proposed regulations sent banks sliding yesterday while commodity stocks also retreated on weaker raw material prices, pulling the FTSE 100 down 1.9 per cent by close.
The FTSE 100 closed down 102.65 points at 5,217.61, having closed 34.49 points, or 0.7 per cent, higher on Wednesday at 5,320.26.
However the blue-chip index is still up 51 per cent from a six-year low in March.
Banks were the biggest drag on the index as investors sold the sector on concerns that new rules proposed by the Basel Committee on Banking Supervision will mean big banks will have to set aside more profits or even raise capital as protection against hard times.
“It’s right to be cautious on banks as prospects for their profitability are going to be limited by the increasing amount of regulation,” said Peter Dixon, economist at Commerzbank.
Barclays, HSBC, Standard Chartered, Royal Bank of Scotland and Lloyds Banking Group fell 3.5 to 8.1 per cent.
The banking sector extended losses after Citigroup got a cool reception for its stock offering which received a much lower price than expected, prompting the US Treasury to delay a plan to sell its stock in the bank.
Retailers were hit after British retail sales fell unexpectedly in November. Home improvements retailer Kingfisher, electricals retailers DSG International and Kesa Electricals, and clothing-to-foods group Marks & Spencer fell 0.5 to 3.6 per cent.
Home Retail was down 4.2 per cent, also impacted by a downbeat note from Credit Suisse saying that structural concerns and price falls at its Argos chain could place pressure on gross profit margins.
Figures from the Office for National Statistics showed sales dropped at their fastest pace since May after department stores and clothing retailers failed to repeat October’s strong sales.
A report from the Confederation of British Industry added to the gloom. It said British retail sales volumes maintained a steady pace of growth in December, but firms are less optimistic about the New Year when value added sales tax rises.
Miners and energy stocks were also weaker as the dollar surged to three-month highs after the Federal Reserve comments on the US economy, hitting commodity prices.
Miners were in reverse, having notched up good gains on Wednesday as metals prices dropped, with gold falling three per cent in European trade. Antofagasta, Xstrata, Lonmin Eurasian Natural Resources and Kazakhmys were down 3.4 to 5.2 per cent.
Energy stocks fell as crude dipped 1.6 per cent, with BG Group, BP, and Royal Dutch Shell down 0.2 to 1.5 per cent. Pharmaceutical stocks were also lower, with Shire a top blue-chip faller, off 1.6 per cent, as UBS cut its rating on the stock to “neutral” from “buy”, mainly on valuation grounds.