The FTSE 100 closed down 16.05 points, or 0.3 per cent, at 5,727.91, extending Friday’s 1.4 per cent fall.
Banks were rattled as investors bet the fraud charges at the US banking giant would reinforce the need for Europe to act to toughen regulation.
HSBC and Barclays fell one per cent and 0.8 per cent respectively.
Goldman Sachs may face legal action from German bank IKB and could be pursued by regulators in Germany and Britain after the US investment bank was accused of duping clients over its marketing of a subprime mortgage product.
“Multiple levels of fallout, both volcanic and otherwise, have contrived to hit market sentiment and push the equity market lower, although it’s now off its lows after positive earnings from Citigroup and positive economic data out of the United States,” said Michael Hewson, analyst at CMC Markets,
First-quarter profits at Citigroup, which beat analyst forecasts, took some sting out of the falls.
State-backed Royal Bank of Scotland rose 4.4 per cent as BofA Merrill Lynch hiked its target price and added the stock to its Europe 1 investment list. Peer Lloyds Banking Group rose 1.1 per cent.
Miners retreated as metal prices fell, with the Goldman allegations clouding the demand outlook and rocking sentiment. Kazakhmys, Vedanta Resources and Antofagasta and Fresnillo were the worst off.