Shares have come off their lows, helped by a better start on Wall Street, but remain under pressure after a warning from insurer Britannic and weakness in the banking sector on growth concerns.
British Airways fell four per cent on fears that a profit warning from Dutch peer KLM might signal troubles elsewhere in the sector. But BA said it still expected "modest" profits for 2002/03.
By 3.05 p.m., the FTSE 100 index of leading shares was down 34.5 points, or 0.9 per cent, at 3,970.4 points. Earlier, the market had reached a low of 3,930.9 points, but recovered some ground after Wall Street opened higher.
Wider sentiment also suffered after market strategists at JP Morgan cut their view on equities to "underweight" from "overweight" and said there was an increased risk of a hard landing for the economy.
Insurers were some of the heaviest fallers after mid-cap listed peer Britannic warned on profits and scrapped its final dividend. Britannic's shares plunged 49 per cent on the warning, while larger rivals Aviva, Friends Provident and Legal & General lost about five per cent.
Banks also struggled, led by a four per cent fall for Barclays. Dealers said investment bank Schroder Salomon Smith Barney had cut its stance on the European sector to "marketweight" from "overweight" on concerns about revenue growth in 2003. Separately, analysts at Commerzbank also said the sector faced a choppy ride over the coming months.