"There are worries about the health of the U.S. economy ... that will persist even if the credit crunch issues ease slightly," said Jane Strawbridge, senior research analyst at Christows Stockbrokers in Exeter.

"I don't think the outlook for the UK consumer will improve any time soon either."

In more grim news for the UK economy, Britain's services sector contracted in September at its fastest rate since records began 12 years ago according to data from the Chartered Institute of Purchasing and Supply/Markit.

Financial stocks were under pressure with sentiment still overshadowed by continued strains in the money markets, with interbank rates remaining high.

Interdealer broker ICAP fell 1.5 percent and London Stock Exchange slid 2.9 percent. Credit Suisse cuts its rating for the UK bourse operator to "neutral" from "outperform."

However. recent heavily sold banks gained with HBOS and Lloyds TSB adding 7.6 and 4.1 percent respectively as investors became more confident that a Lloyds takeover will go through.

Barclays was up 4.1 pct, while Royal Bank of Scotland gained 4.2 percent.

Life assurer Old Mutual added 5.9 percent after it said its Swedish subsidiary Skandia AB has been ordered to pay 47 million pounds to settle a dispute over Skandia's asset management arm.

DARKENING OUTLOOK

Equity investors were nervous as a darkening economic outlook and continuing uncertainty about the fate of a $700 billion (395 billion pound) bailout for the U.S. financial industry has kept the UK blue-chip index close to its lowest level in over three years.

The UK benchmark is down 4.2 percent this week and 25 percent this year.

"There are plenty of reasons for people not to have bets on the table ahead of the weekend," said Jeremy Batstone-Carr, head of private client research at Charles Stanley.

"The markets are going to be treacherous, we are close to two big hurdles, the last of which (the vote on the bailout) is after markets in Europe close... so it will take a tenacious investor to make an investment on a day like today."

Mining stocks fell with gold hit by a rising dollar and platinum near its weakest in almost three years on demand fears, while base metals like zinc and copper were also lower.

Lonmin fell 2.7 percent while Kazakhmys lost 2.5 percent and Anglo American fell 1.5 percent.

British Airways was the biggest percentage loser in the blue-chip index, down 6.2 percent at nearly half its value at the start of the year, as investors fret over monthly traffic statistics due later.

Shares in Imperial Tobacco fell 0.9 percent after Citigroup cut its rating to "hold" from "buy."

Shares in Autonomy Corporation gained 1.2 percent after the software group, recently promoted to the blue chip index, said it expected third-quarter revenue and adjusted earnings per share to be "significantly ahead" of consensus expectations.

(Editing by Greg Mahlich)