LONDON'S benchmark FTSE 100 index fell by almost 100 points yesterday on signs that Chinese monetary policy may be tightening, prompting fears of a drop in demand for commodities.
Traders dumped mining shares on reports that Chinese authorities had ordered the country's banks to cease lending in the short term.
Chinese banks are believed to have sharply increased lending in the first half of January, prompting a possible policy tightening.
Michael Hewson, analyst at CMC Markets, warned: "If accurate, this news has negative ramifications for metal demand."
Mining companies littered the FTSE 100 fallers' board. Eurasian Natural Resources plunged 64.5p at 962.5p, with Xstrata down 75.5p to 1,142p, Lonmin off 124p at 1,880p and Antofagasta dropping 62p to 977p.
Falls among the banking and oil and gas sectors meant the FTSE 100 ended the session down 92.34 points at 5,420.8, its lowest close of the year. The mid cap FTSE 250 index closed down 83.12 points at 9,472.29.
Britain's top flight were lower for most of the session, falling further after a weak start in New York, where the Dow Jones Industrial Average dropped 2 per cent in early trading.
Crude oil dropped below $78 a barrel on the China fears, with BP down 10p to 619.5p and Royal Dutch Shell losing 24.5p to 1,839p.
Cairn Energy, Scotland's largest oil explorer, fell 2.8 per cent to 346.9p.
Imperial Tobacco dropped 69.5p to 1,995p after its shares traded without the right to the company's most recent dividend for the first time.
Banks were also down after weaker-than-expected results from Morgan Stanley and Bank of America.
Barclays led the UK sector down, dropping 3.6 per cent to 300.85p.
Royal Bank of Scotland dropped 0.34p to 38p despite signs that it was closing in on a sale of its commodity trading business.
Pharmaceutical group Shire was the biggest riser in the FTSE 100, climbing 32p to 1,261p, after its shares were upgraded by JP Morgan.
Cable & Wireless also rose on positive analyst comment, climbing 2.1p to 148.1p after Citigroup upgraded the shares to "buy".
Perth-based utility Scottish & Southern Energy was also in demand, up 14p to 1,198p, as investors looked for defensive investments.
Among the mid-cap companies, transport giant FirstGroup was hit by a downgrade from analysts at Morgan Stanley, who cut their target price on the shares by 85p to 430p.
Shares in Aberdeen-based First, operator of the troubled First Capital Connect Franchise, fell 3.7p to 384.6p.
The same Morgan Stanley note upgraded First's rival Stagecoach, increasing the target price on the Perth-based company by 31p to 205p. Stagecoach rose 1.7p to 178.9p.
Pubs group JD Wetherspoon was down 0.7p to 463p as it warned that January's big freeze prevented drinkers from getting to its pubs and depressed like-for-like sales.
Comet owner Kesa Electricals was off 6.3p, to 139.4p amid worries over lower UK sales.
Elsewhere, Optos, the Dunfermline-based company which makes machines to scan the retina, rose to its highest level in more than a year after a strong trading statement for the last three months of 2009.
Optos said that while the number of machines it has installed was still falling as it focuses on better-performing opticians, the revenue per machine is up sharply on a year ago.
Shares in the group jumped 10.5p to 109p.