FTSE: 5,72.81 (-90.85) Mid-250: 11,527.78 (-219.0) Small Cap: 3,237.05 (-38.04):UK STOCKS declined for a third day yesterday amid speculation that European banks will need to raise more capital as stress tests failed to allay investor concern that lenders have insufficient loss-absorbing funds.

Barclays, Royal Bank of Scotland and Lloyds Banking sank at least 6 per cent, leading bank shares lower, as JPMorgan Chase and Co said European lenders may have to raise about €80 billion of additional capital.

The benchmark FTSE 100 fell 1.6 per cent at the close in London, extending last week’s 2.5 per cent slide. The measure has slipped 5.6 per cent since its peak this year on February 8th as concern grew that the European debt crisis will derail the economic recovery.

The FTSE All-Share Index also declined 1.3 per cent.

“Sadly, we think the European banking stress test is unlikely to provide much in terms of assurance to the markets,” Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein and Co, wrote in a report to clients yesterday.

“The concerns about contagion of the sovereign-debt crisis into core Europe have taken centre stage and only a substantial change in the governments’ approach could change the current trend around.”

As many as 20 banks need to bolster capital, JPMorgan analyst Kian Abouhossein wrote in a report at the weekend.

Barclays tumbled 7 per cent to 207.7 pence, RBS slumped 6 per cent to 33 pence and Lloyds sank 7.5 per cent to 41.3 pence.

Risk aversion favoured precious metals miners, with Fresnillo and Randgold Resources the standout FTSE 100 gainers, up 2.1 per cent and 1.7 per cent.

Lavendon Group surged 4.4 per cent to 108 pence, its largest climb in three weeks. The company performed better in the first half than it had forecast, with revenue increasing 8 per cent from a year earlier and operating margins widening, the company said.

Centrica gained 0.4 per cent as Barclays Capital lifted its rating for the energy firm to “overweight” from “underweight”. Bullish broker sentiment also gave Shire a fillip, up 0.5 per cent, with RBS lifting its rating for the drugmaker to “hold” and hiking its target price.

Rank Group rose 1.8 per cent to 153.7 pence as Guoco Group said its shareholding would stay at 74.5 per cent and Rank said it would remain listed following Guoco’s 150 pence a share offer. – (Bloomberg, Reuters)