The FTSE 100 closed down 66.92 points, or 1.1 per cent, at 6,228.42, lagging major European peers.
The index has been the stand-out performer in Europe since the start of 2013, having seen its best January since 1989, and was ripe for profit taking, traders said.
“We haven’t managed to break through 6,300 and hold it. I think it’s just down to profit taking,” said Darren Easton, director of trading at Logic Investments. “I think 6,300 is becoming a bit of a sticking point.”
Since posting its biggest one-day fall in three months on Monday, the index has failed to close above 6,300 all week.
However, the FTSE has gained five per cent so far this year, compared to slight falls year-to-date on the German DAX and the French CAC.
Banks were among the biggest fallers yesterday, with the sector dropping 1.6 per cent after Bank of England governor-designate Mark Carney outlined a tougher line on the sector.
“He came across as much more aware of the need to be more interventionist in banking matters ... I think it’s prescient, I think it’s right, but banks will see the ability to grow revenues switched off,” Gerard Lane, equity strategist at Shore Capital, said.
“Carney’s use of anti-free market tools make it a very different ball game, and the banks in the UK are going to struggle.”
Carney also reaffirmed his faith in flexible inflation rate targeting during an appearance before MPs, pouring cold water on nominal GDP targeting which he had previously floated as an alternative.
Nominal GDP targeting would justify higher inflation rates while growth was below target. Sterling rose after Carney showed little bias towards immediate looser monetary policy, wrongfooting many investors who had expected him to be more dovish.
One such firm hit by changing operating realities was Burberry Group, which was the worst-performing blue-chip stock, tumbling 4.6 per cent.
Rival luxury goods companies also fell as traders cited a Chinese advertising ban on certain expensive gift items as hurting the sector, undermining the assumption that strong demand from rich emerging market consumers could help support sales.
However, mobile phone operator and market heavyweight Vodafone provided basic support to the market. It rose 0.9 per cent, bolstering the FTSE 100 index by 3 points alone, after the group maintained its outlook for the year and analysts expected the firm to dodge earnings forecast cuts, despite weak third-quarter sales.