"A disappointing trading statement from Vodafone, which although arguably offers a recession-proof service, does cast doubts upon the near-term prospects of the telecom sector," said Andrew Turnbull, director at Blue Index CFDs.

"Our clients have been advised to remain net short of the market as the prospect of any lasting rally is unlikely, considering the number of negative factors present in the market," he said.

Banking shares fell again after recovering in the previous session on initial reaction to results from Bank of America , as investors remained concerned about further writedowns and the sector’s ability to raise more capital.

The sector extended losses after U.S. bank Wachovia Corp posted an $8.86 billion (4.41 billion pounds) second-quarter loss and slashed its dividend for a second time this year, hurt by a big goodwill charge and an increase in reserves for bad loans as mortgage defaults soar.

NEGATIVE RATINGS ON BANKS

Fitch said it expected further negative rating actions on global banks in the coming months, as the operating environment remained tough and the global economy continued to slow.

Gerry Rawcliffe, managing director at Fitch’s Financial Institutions Group, said in a report that banks in developed markets now faced the prospect of increased credit costs on top of higher funding costs.

HBOS fell 2.7 percent after an emergency fund-raising by the home lender flopped, leaving underwriters with large amounts of stock. Royal Bank of Scotland , Barclays , HSBC , Lloyds TSB and Standard Chartered fell between 2.3 and 6.2 percent.

"We had some reasonably reassuring comments from some of the U.S. banks in recent days, but it’s difficult to say that all of the difficulties in relation to the credit market are behind us," said Keith Bowman, analyst at Hargreaves Lansdown.

"I am sure we are going to be results-driven in the next few days," he added.

But miners bucked the falling trend on higher metals prices. BHP Billiton , Anglo American , Vedanta Resources , Lonmin , Xstrata and Eurasian Natural Resources rose between 0.4 and 1.5 percent.

Oils shares also gained, with BP , Royal Dutch Shell , BG Group , Cairn Energy and Tullow Oil all advanced between 1.3 and 8.2 percent.

Enterprise Inns fell 14 percent, making it among the top FTSE losers after Britain’s second-biggest pubs group said group earnings had come under pressure in the first 42 weeks of its financial year due to a continuing fall in beer sales.

"We are less convinced than others about the resilience of the business model, and view today’s trading update as downbeat," Lansbanki’s Mark Reed said in a note. "Future growth looks anaemic."

(Additional reporting by Dominic Lau; Editing by Quentin Bryar)