Banks wiped 17 points off the FTSE amid revived worries of a possible rise in UK rates that would hit demand for loans.

Lloyds TSB and Barclays both lost more than 3%.

Underlying the rate worries, bonds -- whose fixed return makes them linked to interest rate and inflation expectations - also weakened.

The long gilt future was off 0.24 points at 109.68, after a warning on inflation by economist Sushil Wadhwani, a member of the Bank of England's Monetary Policy Committee.

On the corporate front, the focus was on Vodafone, as Mannesmann's board convened to discuss Vodafone's all-share terms and investors assessed its merits and chances of success.

"The bid price values Mannesmann fairly and first impressions are that it is not unduly dilutive to Vodafone shareholders, providing the management can achieve the synergies they expect," said Graham Wood, head of UK and European Equities and Standard Life Investments.

Yet Vodafone's bid still faces scrutiny by the European Union's competition authorities and has to win over Mannesmann's potentially sceptical German shareholders.

Elsewhere in the sector, British Telcom shrugged off recent profit-taking pressures to end the day up 3% as some investors opted for the relative security of the stock amid the Vodafone uncertainties.