Banks Pull FTSE Down 0.4 Pct At Close

Barclays advanced nearly 7 percent after losing nearly one-third of its value in the previous two sessions.

Britain's top share index closed 0.4 percent lower on Tuesday reflecting another tumble by banks as investors shunned the beleaguered sector, although gains by defensive drug issues and heavyweight oils limited losses.

At the close, the FTSE 100 index was down 17.07 points, or 0.42 percent, at 4,091.40, after losing 0.9 percent on Monday.

The UK benchmark index is down over 7 percent this month after plunging more than 31 percent last year.

Lloyds Banking Group was the main casualty on Tuesday, shedding almost a third of its value, having touched its lowest level in more than 20 years on continuing woes in the banking sector. A spokesman from Lloyds said the bank continued to trade satisfactorily since its last update.

"Royal Bank of Scotland's shares were hammered yesterday, and today it's Lloyds' turn," said Manoj Ladwa, senior trader at spread bettors ETX Capital.

"Essentially, the market isn't buying the government's rescue package... and is betting that further banking nationalisations will be necessary. There are some aggressive research notes out from the sell side houses, and U.S. investors are piling out of the sector," Ladwa added.

Barclays also fell sharply, down 17.2 percent, while HSBC shed 3.2 percent, and Royal Bank of Scotland fell 11.2 percent, having lost two-thirds of its value on Monday.

The pound fell to a 7-1/2 year low against the dollar below $1.40 as the banking sector's woes battered the currency.

Britain threw its troubled banks another multi-billion pound lifeline on Monday by allowing them to insure against steep losses and guaranteed their debt to stop the credit crunch pushing the economy deeper into recession.

Across the Atlantic, the banking sector also took a pounding, led by State Street which reported an increase in unrealised losses, with U.S. blue chips down over 1.5 percent by London's close.

Barack Obama takes over as U.S. president Tuesday with hopes riding high that he can conjure up a rescue that will jolt the world's biggest economy back into life and contain the crisis ravaging financial markets.

"Today is all about the 'O' factor," said Chris Bennett, senior trader at binary betting firm ChoiceOdds. "Who would bet against a strong Dow rally if traders across the pond replicate the goodwill and positive sentiment expressed by their countrymen as they welcome the arrival of the 44th President?"

DEFENSIVES PROVIDE RELIEF

Drugmakers, deemed defensive by investors, were in demand, with GlaxoSmithKline up 1.3 percent, AstraZeneca rising 1.6 percent and Shire gaining 1.4 percent.

Cigarette makers also rose as investors sought less risky areas, with British American Tobacco and Imperial Tobacco up 2.2 and 1.7 percent respectively.

Gold miner Randgold Resources was the top blue chip riser, up 8.1 percent with the stock seen as a proxy for the safe haven of the yellow metal, up over 3 percent.

Oil producers were mainly higher as crude prices firmed, with BP, Royal Dutch Shell, BG Group and Cairn Energy up between 0.2 and 2.7 percent.

Tullow Oil missed out, however, losing 5.1 percent with vague rumours that a trading update due Wednesday might by accompanied by a capital raising. Tullow declined to comment.