London's losses deepened on Monday after US insurer AIG sent shockwaves around the global sector.
The US group's auditors said they had found a "material weakness" in how the company values its credit default swap portfolio, forcing AIG shares down more than 10 per cent.
The malaise spread to the UK insurance sector, and half an hour after Wall Street's downbeat open, Royal & Sun Alliance was the biggest loser on the FTSE 100, down 5.5 per cent at 123p.
The list went on: Old Mutual fell 4.5 per cent to 118p, Resolution lost 4.7 per cent to 682p, Aviva shed 4.6 per cent to 553p, Legal & General was ff 4.1 per cent, Standard Life lost 3.6 per cent to 198p and Prudential fell 3.6 per cent to 169p.
Meanwhile, fears remained that banks will require further writedowns related to complex debt securities as a new report showed the market for collateralised debt obligations (CDOs) had its worst month in January for more than 10 years.
Speaking at the G7 meeting in Japan this weekend, Peer Steinbruck, German finance minister, said write-offs related to the US mortgage crisis could reach $400bn.
Ahead of its figures on Wednesday, Bradford & Bingley fell 1.5 per cent to 239¼p while Alliance & Leicester lost 5.3 per cent to 575p, HSBC dropped 2.9 per cent to 715½p and Barclays (NYSE:BCS) was 3 per cent lower at 428½p.
Analysts at HSBC on Monday lowered price targets of Royal Bank of Scotland, Lloyds TSB, Standard Chartered, B&B, A&L, HBOS and Barclays.
By mid afternoon, the FTSE 100 was down 75 points, or 1.3 per cent, at 5,709.0 while the FTSE 250 lost 80 points, or 0.8 per cent, to 9,727.5.
The latest economic data also weighed on sentiment as news of a sharp rise in factory gate inflation raised fears about the Bank of England's scope to cut interest rates.
Producer price inflation data rose more than expected in January to its highest rate in more than 16 years, as separate figures showed the UK's trade deficit with the rest of the world came in worse than expected in December at £7.574bn.
"The December trade data are likely to reinforce the Bank of England's concern about inflation," said Howard Archer at Global Insight.
Goldman Sachs was downbeat on the UK housebuilders, adding both Taylor Wimpey and Barratt Developments to its "conviction sell" list.
The broker said that they were "the more highly geared UK housebuilders exposed to the housing slowdown that we expect in 2008 and 2009".
Taylor Wimpey fell 3.3 per cent to 169p, Barratt lost 1.7 per cent to 371¾p and Persimmon fell 2.3 per cent to 691½p s Goldman cut its rating from "neutral" to "sell".
Anglo American (NYSE:AIG) fell 1.4 per cent to £29.38 after Anglo Platinum, its majority-owned South Africa-based subsidiary, forecast lower output for 2008 due to power shortages.
Rio Tinto fell 1.9 per cent to £52.29 after writing to shareholders to explain its rejection of last week's $147bn all share offer from BHP Billiton (NYSE:BHP). Rio said the offer from BHP failed to recognise the underlying value of its operations. BHP fell 1.5 per cent to £14.79.
Smiths Group, the defence and engineering company, fell 1.5 per cent to 933p after a lacklustre trading statement while Unilever fell 2 per cent to £15.91 after the consumer products group was downgraded from "buy" to "neutral" at UBS on concerns that rising commodity costs would eat into profits.
Overnight in Asia, the Hang Seng index ended 1.5 per cent lower at 23,114.50 in thin trading.
The S&P/ASX 200 index closed down 120.4 points or 2.1 per cent at 5537.6 in Sydney.
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