The FTSE 100 Index has followed world markets into the red as eurozone debt fears resurfaced to impact on confidence.
The cost of borrowing in Portugal hit a euro-era high earlier and reignited concerns the Iberian country would be forced to turn to the European Union for bail-out funds to revive its troubled economy.
The FTSE 100 dropped 58 points to 5993.1, led by the banking sector and miners, while the CAC-40 in France slipped 0.8% and Germany’s DAX fell 0.4%.
The concerns came as Portuguese 10-year bond yields jumped to 7.35% – the highest since the launch of the euro in January 1999.
Barclays, which is heavily exposed to the Iberian peninsula, fell nearly 2% or 5.9p to 310.5p, while Royal Bank of Scotland dropped 0.2p to 44p and Lloyds lost 0.4p to 64.95p.
In London, the Bank of England decided to hold interest rates at their historic low of 0.5%, but speculation earlier in the session over the outside prospect of a rates hike spooked investors.
In corporate news, traders were disappointed by half-year results from drinks giant Diageo, which came in short of expectations. Shares fell nearly 5% or 57p to 1196p.
Elsewhere, traders were shaken by a profit warning from Air France-KLM and pulled out of British Airways parent International Consolidated Airlines Group, sending the company to the bottom of the index. Shares fell nearly 5% or 12.9p to 246.7p.
Rolls-Royce was also in the spotlight as underlying pre-tax profits rose 4% to £955 million in 2010, despite a hit of £56 million relating to the mid-air failure of one of its Trent 900 engines on a Qantas superjumbo. The figures were better than expected but shares still retreated 11.5p to 644p.
Hip replacement maker Smith & Nephew saw shares rise after it reported better-than-expected results following a strong performance from its knee and trauma units. The Hull-based firm, whose shares have hit new highs recently following takeover speculation, saw its stock rise 12.5p to 724.5p after it posted a 9% increase in trading profits to 278 million US dollars (£173.1 million) in the final quarter of 2010.
