At the close, the FTSE 100 index was down 59.48 points, or one per cent at 5,846.95, reversing all and more of the previous session’s 0.6 per cent rally.
“The FTSE is struggling to make any headway at the moment as I think traders are so wary of this market whip-sawing around,” said David Morrison, market strategist at GFT Global.
Banks were volatile as concerns over their exposure to the Eurozone debt crisis continued, with better-than-expected earnings from JPMorgan Chase, the first US bank to report second-quarter results, shrugged aside.
“It’s really very nervous out there, with the Eurozone debt concerns bubbling away, undermining anything that could be considered positive,” Morrison added.
JPMorgan’s numbers set the bar for Citigroup, which will continue the sector reporting season on Friday, and helped US blue chips to gain 0.1 per cent by London’s close, helping sideline a threat to the US’s credit status.
Moody’s Investors Service said on Wednesday that the US may lose its top-notch credit rating if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments. .
British banks were also cautious ahead of the publication on Friday of the results of the European Banking Authority stress tests on 91 banks from across the European Union.
“We expect all of the UK banks to pass the test, but would question its relevance given that the risk of a European sovereign default is not being captured,” Shore Capital analyst Gary Greenwood said in a note.
Lloyds Banking Group, however, bucked the dull sector trend, adding 3.2 per cent, supported by an upgrade in rating by Goldman Sachs to “buy”, with the broker bullish about part-nationalised lender’s longer-term prospects.
Precious metals miner Fresnillo was the biggest FTSE 100 gainer, adding 4.9 per cent after it posted record silver and gold production in the second quarter at a time when the gold price is at a life-time high.
But specialty miners and metals were weak, with copper prices slipping back.
Rio Tinto, down 1.2 per cent, failed to be helped by an in-line production output, with the global miner on track to hit its 2011 iron ore production target.
And integrated oils fell as a sector as crude prices dropped by over 1.6 per cent on demand doubts over the sustainability of a sluggish global economic recovery.
Oil services firm Petrofac was the top FTSE 100 faller, losing 3.8 per cent as Barclays Capital downgraded its rating to “underweight”, mainly on valuation grounds, in a review of the European sector.
Peer Amec , down 1.1 per cent, also suffered the same cut at BarCap’s hands.
Broker comment blighted Man Group as well, with the world’s largest hedge fund manager losing 2.1 per cent as HSBC cut its recommendation to “underweight” from “neutral”.
On the upside, Associated British Foods added 2.3 per cent after the food producer to clothing retail group said it is on track to meet its full-year earnings targets, prompting Panmure Gordon to raise its recommendation to “buy” from “hold”.