The FTSE 100 closed down 59.38 points, or 1.1 per cent, at 5,217.47, its lowest close since 18 December. The index gained 0.3 per cent on Tuesday, snapping a four-session losing streak.
“The major story which is moving everything is this China situation and the possible moves to stop the overheating economy,” said James Hughes, market analyst at CMC Markets.
Energy stocks were the biggest drag on the index, as the outlook for demand for crude was clouded by China’s heightened efforts to rein in soaring credit growth.
BG Group, BP and Royal Dutch Shell fell 1.3 to 2.4 per cent. Tullow Oil was among the biggest fallers, off 4.6 per cent after it launched a $1.6bn share sale to pay for the development of assets in Uganda.
China’s largest bank ICBC said on Wednesday it had stopped rolling over some loans after a surge in credit at the start of the year, evidence that banks may finally be heeding a government-directed clampdown.
Against a background of weaker metals prices, the mining sector was also on the back foot, with Fresnillo, Xstrata and Anglo American shedding 3.1 to 3.7 per cent.
Banks were in the doldrums after Spain’s second-largest bank BBVA reported a rise in bad loans.
Barclays, HSBC, Royal Bank of Scotland, Standard Chartered and Lloyds Banking Group lost 0.8 to 5.2 per cent.
Man Group was the biggest blue-chip faller, down 6.5 per cent after Credit Suisse cut its estimates and target price for the hedge fund manager, in part to reflect weak returns from its flagship AHL fund.
There were nerves ahead of the conclusion of the latest two-day Federal Reserve Open Market Committee meeting, although a decision on US interest rates and the central bank’s quantitative easing policy is not due until 1915.
US President Barack Obama’s State of the Union speech later in the day will also be closely watched by the market.
With investor appetite for risk muted, defensive issues found favour. Cigarette firms British American Tobacco and Imperial Tobacco rose 1.2 and 0.5 per cent, respectively.
Cobham gained 1.1 per cent, helped by positive comment from Morgan Stanley, with the broker saying the firm is its top pick among European defence players.
Upbeat broker sentiment also gave SABMiller a lift, up 1.6 per cent, with Credit Suisse reiterating its “outperform” rating on the brewer after a meeting with management.
Caterer Compass Group fell after going ex-dividend.
Highlighting the stiff headwinds buffeting the British economy, data from the Confederation of British Industry showed retail sales volumes fell unexpectedly this month.