"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 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.

Barclays , Lloyds TSB , HSBC and HBOS shed 0.1-2.9 percent.

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.

"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."

Further on the downside, Enterprise Inns , Britain’s second-biggest pubs group, plummeted 13.4 percent after it said its profit was under pressure from falling beer sales and the cost of helping struggling tenants.

LONMIN BID TALK

Shares in Lonmin , the world’s third biggest platinum producer, gained 5.2 percent to buck a downward mining trend, as traders cited talk of a 3,450 pence per share bid by rival Xstrata .

Lonmin was not immediately available for comment.

Xstrata fell 3 percent.

Oils shares gained, with BP , Royal Dutch Shell , Cairn Energy and Tullow Oil up between 0.8 and 6.2 percent.

"After a couple of days’ break, Tuesday has seen a return to the more pessimistic view of things but so far at least the market has held up reasonably well," said David Jones, chief market strategist at IG Index.

"For many the 5,200 area is still the big one for the FTSE and as long as any weakness does not probe below here, hopes remain for further recoveries over the days to come."

(Additional reporting by Dominic Lau and Atul Prakash; Editing by David Cowell)