The growing popularity of former premier Silvio Berlusconi ahead of elections in Italy and a corruption scandal in Spain fanned concerns that political instability could undermine the region’s slow progress out of its debt crisis.
Any setback there is also likely to hit Britain, for whom the Eurozone is the top trade partner, and whose corporates have already taken hits from problems in Southern Europe.
That, together with the hefty seven per cent rally in Britain’s FTSE 100 so far in 2013 and the strong performance fuelled by new-month money on Friday, prompted some investors to cash in.
“It’s just a bit of profit-taking today, it's been coming for a while. We were over-bought and we have seen a few guys come and look at names that have had big moves,” said Martin Tormey, head of equity trading at Goodbody Stockbrokers.
“I don’t think it’s any more than that ... There is a lot of money sitting on the sidelines and we definitely sense from clients that there is a lot more fear of the market going up than of the market going down.”
The UK blue chip index closed down 100.40 points, or 1.6 per cent, at 6,246.84 points, retreating after posting its highest finish since May 2008 on Friday.
The banking sector, the most directly exposed to Eurozone woes through their holdings of sovereign debt, was one of the worst performers, down 2.2 per cent as investors booked profits on a rally of over 10 per cent in early 2013.
Traders said the Eurozone jitters – which pushed the yields on 10-year Spanish and Italian government bonds to 2013 peaks – were the main driver for the UK sector, overshadowing plans by British chancellor George Osborne for a new law to break up banks that fail to shield retail operations from risky investments.
“Obviously Eurozone politics don’t help the overall situation and the yield spikes in Italy/Spain 10-year bonds are arguably the bigger driving force behind today’s selling than anything the chancellor said this morning,” said Matt Basi, head sales trader at CMC Markets.
Heavyweight energy companies also suffered, as oil prices retreated on concern over geopolitical tension in the Middle East.
Yesterday’s drop – the biggest since November – pushed the index below minor resistance at the 10-day moving average around 6,268.80, but that was not enough to cast a shadow over the broader uptrend that has been intact since June 2012.