LONDON: Britain's leading shares kicked off the week with further price falls as investors continued to fret over the fractious political handling of Europe's debt crisis and a weakening global growth outlook.
Lack of any unified action at a weekend meeting of the G7 finance ministers and Friday's resignation of a European Central Bank board member fuelled the concerns, while talk of a Greek default and possible rating downgrade of French banks added weight to Monday's market falls.
"Another disappointing talking shop outcome over the weekend, this time from the G7 whose latest gathering appeared to offer scant details about its reported plans to promote growth," Altium Securities strategist Ian Williams said.
With the resignation of ECB member Juergen Stark highlighting "a lack of unanimity about the right course of action" to take on the euro zone debt crisis, investors were likely to keep selling into any temporary strength and favor defensives, he added.
Banks, heavily sold off in the year to date as the debt crisis, regulatory change and funding issues all took their toll, were once again the main focus of UK investors, after the Independent Commission on Banking released its long-awaited proposals for reforming the sector.
Released before the market open, the government-appointed Commission recommended a number of fundamental structural changes including, as expected, a ring-fencing of retail banking operations from the investment banking side.
More bearishly, however, the report seemed to take a harder line than anticipated on capitalization requirements and also estimated the proposed changes would cost UK lenders an aggregate 4 billion to 7 billion pounds a year.
In response, shares in Royal Bank of Scotland, Lloyds Banking Group and Barclays, expected to be the worst hit of UK lenders, were all down around 4.6 percent.
HSBC and Standard Chartered, less affected by the report due to their business structure and geographical focus, were relative outperformers, nursing early losses of 1.4 percent and 1 percent, respectively.
"With the exception of Standard Chartered, the implications of the ICB report are negative to long-term return on equity prospects for all of the UK banks, in our view," Shore Capital analyst Gary Greenwood said in a note.
In addition to the ICB news, bank shares were also weighed on by increased talk in German political circles of a Greek default, as it struggles to implement austerity cuts and secure bailout funds, and separate talk that French banks could be about to be downgraded. As a result of all these factors the Stoxx Europe 600 banking sector index was down more than 4 percent.
At 0822 GMT the FTSE 100 index of leading British blue-chips was down 2.4 percent at 5,087.98 points, adding to the previous session's 2.4 percent fall and leaving the index down 5.6 percent so far in September, and 13.7 percent this year.
Writing ahead of the market opening, James A. Hyerczyk, technical analyst at Autochartist said a test of the "swing bottom" at 5,086.80 points would see the trend turn down on the 240-minute chart.
While early trade saw this level and the September low of 5,086.50 breached, trade remained choppy and conviction for a sustained break below that level was light.
The index has fallen 13.5 percent in the year to date as investors bail out of assets perceived as more risky, although that same reticence has not been felt by corporates themselves, analysts at Goldman Sachs said in a note.
"UK Plc is arguably more optimistic about its fortunes than are investors; companies have bought back shares worth 1.5 billion pounds per month in the last few months. We think there is value in equities relative to both bonds and growth prospects."
The bank said it would keep its 12-month index target of 6,200, although "near-term risks are high, earnings estimates need to fall, and debt funding issues remain. We shift slightly more defensive in our sector views".
While equity valuations "appear low on almost any metric", said analysts at UBS in a note, "attractive multiples will not be sufficient to convince investors to re-engage risk assets."
"What is required, we believe, is increased confidence in the near- and medium-term growth outlook, and more stability within the European sovereign debt markets and banking system," they added.