Leading shares have dropped over one per cent as fears about sluggish corporate earnings growth and Mideast hostilities returned to deter investors, who shrugged off positive economic data.
Mortgage bank Abbey National led banks lower with a 5.3 per cent drop to a 21-month low in the wake of last week's profits warning, more than outweighing gains from British Airways and ICI after positive news.
The FTSE 100 share index closed down 54.8 points, or 1.2 per cent, at 4,702.0, after sinking as low as 4,697.7.
Banks took 25 points off the FTSE's value, as dealers said worries about bad debt provisions continued to hamper the sector after Abbey's warning.
Pharmaceuticals and telecoms stocks took off another 19 points between them as both sectors resumed their descent after Monday's bounce failed to gather momentum. Mobile phone operators Vodafone Group and mmO2 both fell over three percent.
Technology stocks were generally lower and chip designer ARM Holdings lost 2.5 percent, as dealers said the mood in the sector was knocked after investment bank Morgan Stanley cut its earnings forecasts for U.S. computer giant IBM.
Data showing UK inflation fell further than expected last month had a limited impact on stocks, despite reducing the threat of an interest rate hike next month.