Britain's leading share index slipped 0.3 per cent yesterday as Royal Bank of Scotland led banks lower after unveiling a hefty rights issue, while mining shares rose on strong metal prices.
The FTSE 100 ended down 18.3 points at 6,034.7.
European markets and stocks on Wall Street also fell.
The pan-European FTSEurofirst 300 index unofficially closed down 0.6 per cent at 1,303.88 points.
RBS lost 3.9 per cent after revealing a record £12 billion rights issue to cover increased write-downs on the value of toxic assets and help repair one of the sector's most stretched balance sheets.
Britain's second biggest bank said it would also sell assets to generate £4 billion in core capital this year, mostly from the possible disposal of all of or a stake in its insurance arm, which includes brands Direct Line and Churchill.
Other banks to fall included HBOS, Barclays and Lloyds TSB.
"Bad day for banks," said Mark Priest, senior trader at TradIndex. "Rumours abound that other banks are going to follow suit."
"In America whether they (banks) announce a big loss the market rallies, and yet (not) over here... I don't know whether it's one of these 'buy the rumour sell, the fact' scenarios."
"It's really quiet," he said about the market in general, adding: "It does seem as though people have taken a step away."
The RBS news comes one day ahead of the bank's annual general meeting and just one day after the Bank of England's offer to swap government bonds worth £50 billion for banks' riskier mortgage debt in an effort to ease the effects of a credit crunch on Britain's banking system.
Bucking the downward trend, mining stocks rose as metal prices firmed. BHP Billiton, Rio Tinto, Kazakhmys and ENRC shed 2-8.7 per cent.
Oil shares were also mostly higher as world oil prices rose to hit a record high of $118.85 a barrel. BP traded 0.4 per cent higher, Cairn Energy firmed 1.2 per cent and Tullow Oil rose by 1.5 per cent.
"We have now broken $18. I can't see us stopping unless Opec suddenly opens the oil floodgates and I can't see that happening," said TradIndex's Priest.
Shares in British energy firm Centrica also featured on the upside, gaining 1.5 per cent on the back of market talk that Warren Buffett's Berkshire Hathaway investment group was building a stake in the company, traders said.
Centrica declined to comment.
Among decliners, food and beverages stocks fell across the board with Associated British Foods slipping 2.1 per cent after the owner of Primark discount clothes stores and Silver Spoon sugar refiner posted a five per cent rise in first-half profit and said economic conditions were difficult.
Sugar producer Tate & Lyle lost 3.1 per cent.
Housebuilding stocks fell after Merrill Lynch cut its 2008 volume expectation to a 25 per cent drop from a 15 per cent fall, expecting no volume growth in 2009 compared with its previous five per cent growth expectation.
Persimmon fell 5.3 per cent and Taylor Wimpey dipped 5.6 per cent while Barratt Developments shed 5.1 per cent. Bovis Homes lost 3.6 per cent, Redrow dropped 2.2 per cent and Bellway slipped 3.3 per cent.
Retailers also lost ground, as traders cited sector switching, with Home Retail down 4.2 per cent and Kingfisher 2.8 per cent lower.