"National Australia Bank said it had low appetite for acquisitions at the moment while refusing to comment directly on the HBOS report."
By Michael Taylor of Reuters
LONDON -- Britain's benchmark share index fell 0.4 per cent in early trading as banks and financials suffered from writedown concerns, while oil shares tracked rising crude prices.
At 1753 AEST the FTSE 100 lost 22.9 points at 5,339.4. It has fallen over 17 per cent so far this year.
The negative sentiment was in part due to US markets shedding more than 2 per cent overnight after a report showing yet another drop in US home sales prompted investors to take profits in financial shares.
Japan's Nikkei average slid 2 per cent on Friday after gaining about 6 per cent this week.
UK banks and financials were a drag on the market, with HSBC, Barclays, Lloyds TSB and Royal Bank of Scotland down 1.6 to 4.7 per cent.
HBOS slipped 4.2 per cent after traders doubted a report in the Daily Telegraph which said that US investment bank JPMorgan and National Australia Bank had held talks about forming a consortium to break up the British bank.
National Australia Bank said it had low appetite for acquisitions at the moment while refusing to comment directly on the HBOS report.
"It's not too bad, just a reality check that everybody thinks it's all over -- it's wrong," said David Buik, a strategist at BGC Partners.
"We've had a ridiculous rally in the banks (in recent sessions) from a very low level which was right because when you've had over a year of writing off debt, you must be somewhere near the bottom. You are going to get stuttering situations."
Bank of England deputy governor Charles Bean said late on Thursday economic growth will be slower and inflation stronger than the central bank forecast in May and policymakers are trying to balance those competing risks.
"What will be confirmed in an hour's time or so, is that we are heading south in terms of growth," Buik said. "We've had a reality check but I think we will crack on again up to about 5,400, then a sharp correction again from the end of August." A report showed that rising costs and depressed demand could reshape Britain's retail industry over the next 10 years, with bankruptcies and job losses set to rise as companies struggle to adapt.
Marks & Spencer lost 5.6 per cent, Carphone Warehouse shed 2.7 per cent and Kingfisher was down 3.1 per cent.
Oils rise
Oil and gas companies supported the market as US crude prices rose toward $US126 a barrel. They extended a rebound a day earlier that helped stem a nearly two-week dive as buyers crept back into the market before the weekend, superseding lingering demand worries.
BP, Shell, BG Group and Tullow Oil tacked on between 0.5 and 2.9 per cent.
On the merger and acquisition front, nuclear operator British Energy lost some of its earlier gains to trade flat after a source briefed on the matter said the nuclear operator had agreed to be taken over by French utility EDF for around 775 pence per share.
United Utilities rose 0.8 per cent after it said trading for the current year was in line with expectations and increased its final dividend by nearly 4 per cent compared to the previous year.
British pubs operator Mitchells & Butlers was up 5.3 per cent after it saw a small pick-up in trade over the past 10 weeks, reflecting continued strong demand for food and with diners accounting for two thirds of its sales.
Services conglomerate Rentokil plummeted 28.6 per cent to an 18-week low in early trading after its fourth profit warning since December, with new CEO Alan Brown telling reporters the company's full-year profit will be 23 per cent below analysts' consensus at 151 million pounds.
