The FTSE 100 index ended 85.70 points lower at 5,335.10, its lowest since 22 December. The index closed down 1.7 per cent the previous session, pressured by signs that China might tighten fiscal policy.
Miners took a hit after a report on the website of the Sydney Morning Herald said that a review of Australia’s tax system had recommended a levy that would hit mining firms.
Rio Tinto, Xstrata, BHP Billiton, Anglo American and Kazakhmys were among the biggest fallers, down 3.8 to 6.2 per cent.
But the sector was already on the back foot as metal prices had retreated amid fears that China could tighten fiscal policy.
Data released overnight showed China’s economy expanded by 10.7 per cent between October and December, compared with a year earlier, up sharply from 9.1 per cent in the third quarter.
“There’s a Chinese shadow over the market and investors are looking to see whether the economy is overheating and whether there will be a pullback in economic growth,” said Keith Bowman, analyst at Hargreaves Lansdown.
Banks were also heavy losers, already pressured ahead of a speech given just as European markets were closing by US President Barack Obama, in which he proposed new limits on the size and trading practices of big banks.
The sector was also weighed down as Goldman Sachs set aside nothing for compensation in the fourth quarter and gave $500m (£309m) to charity, helping it to report better than expected results.
Royal Bank of Scotland was the top FTSE 100 faller, down 7.1 per cent while Lloyds Banking Group, HSBC and Standard Chartered were down 1.2 to 5.9 per cent.
Worries have built up over the state of the industry following a glut of disappointing earnings from US banks in the past week.
Pharmaceutical stocks were among a select group of stocks in positive territory on hopes Obama’s healthcare plan will stall and as investor risk appetite waned.
AstraZeneca climbed one per cent after Morgan Stanley upgraded its rating to “overweight” from “equal weight”.
Some other defensive stocks also gained. United Utilities advanced 3.2 per cent as investors cheered a small-than-expected dividend cut.
Severn Trent was also higher, up 1.8 per cent. It announced its decision to rebase its dividend on Tuesday.
British Airways was the top performer, having been one of the few stocks to advance on Wednesday following confirmation by cabin staff they would not strike over Easter and with hopes its planned merger with Iberia will proceed soon.