Britain's top share index ended down 1.9 per cent yesterday, led by commodity stocks as metal and crude prices fell, and by banks on uncertainty over a proposed US package to rescue the financial sector.
The FTSE 100 closed 100.1 points lower at 5,136.1, but well off its day's low of 5,076.3. The UK benchmark lost 1.4 per cent on Monday, and is down 20.5 per cent for the year.
Banks were among the standout losers, with Barclays, Royal Bank of Scotland, Lloyds TSB, HBOS and Standard Chartered losing between two and 13.8 per cent.
US Federal Reserve chairman Ben Bernanke told the Congress that financial markets are under severe stress and urged immediate action to buy up hundreds of billions of dollars worth of tainted mortgage assets.
Treasury Secretary Henry Paulson also called on the Congress not to weigh down the proposed bailout with unrelated provisions that would delay addressing key issues.
In the United Kingdom, the British Bankers' Association said mortgage approvals fell 64 per cent on the year to a record low in August, suggesting no end was in sight for the country's housing market woes.
Hedge fund Man Group closed the day down 8.2 per cent. Traders said its omission from the list of stocks in which short-selling is banned raised the chance it will be targeted, while at the same time the list limits its ability to generate revenue by shorting other stocks.
Miners sagged along with weaker metal prices. BHP Billiton, Rio Tinto, Anglo American, Xstrata, Vedanta Resources and Eurasian Natural Resources shed between three per cent and 11.4 per cent.
Among energy stocks, BP, BG Group, Cairn Energy and Tullow Oil fell between 1.8 per cent and 4.6 per cent.
Elsewhere, among retailers, Marks & Spencer lost 1.9 per cent after Deutsche Bank downgraded its rating on the retailer to "hold" from "buy", traders said, with some suggesting the sector could be the next to come under pressure from short-selling.
"The feeling is that since short-selling has been banned on financials, it looks like retailers and housebuilders are the next," said Chris Hossain, senior sales manager at ODL Securities.