The FTSE 100 closed 20.65 points, or 0.4 per cent lower at 5,548.62. It gained 6.2 per cent in September and 12.8 per cent in the third quarter.
Sharp falls in US weekly claims for jobless benefits and early signs of strength in September business activity helped to lift stocks in afternoon trade, but uncertainty over the outlook for banks and the wider economy saw it retreat just before trading closed.
“There’s optimism out there and investors are happy to see modest improvement but we are going to see insipid reaction to positive data,” David Buik, senior partner at BGC Partners, said.
Trade was also volatile as investors adjusted positions at the end of the quarter.
Banks took most points off the index, extending Wednesday’s sharp losses.
Ireland’s central bank has put a €34bn (£29.4bn) price on bailing out Anglo Irish Bank under a worst-case scenario and said Allied Irish Banks needs to raise an additional €3bn by the end of the year.
Barclays fell 1.9 per cent while HSBC lost 0.6 per cent.
But elsewhere among financials Man Group was the top gainer, up 2.8 per cent, buoyed by a supportive note from UBS which reiterated its “buy” stance on the stock.
BP gained 1.6 per cent as the oil major’s chief executive Bob Dudley told the BBC that the company wanted to resume paying a dividend in 2011.
BP and other energy firms like Royal Dutch Shell, up 0.3 per cent, were also supported as oil prices rose around $1 to near $79 per barrel.
But overall investors were cautious and a wide range of shares were weaker. Supermarket Tesco and miner Xstrata were both down around two per cent.
Moody’s Investor Service cut Spain’s credit ratings to Aa1 from AAA, with a stable outlook, saying it sees weak economic growth prospects for the Eurozone’s fourth-biggest economy.
“The Spanish downgrade, although expected, together with the concerns over the banking situation in Ireland means investors remain wary,” Mic Mills, head of electronic dealing at ETX Capital, said.
Compass Group fell 3.8 per cent after a “disappointing” in-line trading statement, said trader Ben Critchley at IG Index, although brokers remain generally positive about the catering group’s longer-term outlook.
On the upside, Burberry climbed two per cent after Bernstein issued a broadly positive note on the luxury goods sector.
Upbeat broker sentiment also helped defence and electronics firm Smiths Group, up 1.9 per cent, with Morgan Stanley hiking its target price for the technology group following full-year results on Wednesday.