Lloyds falls amid FTSE 100 slide
Lloyds Banking Group led the sector lower despite the Treasury's successful sale of a £3.2 billion chunk of the t axpayer-backed lender.
The group's shares dropped 4% or 2.7p to 74.7p as the City digested the stake sale, easing back slightly below the 75p paid last night by a global spread of firms for a 6% stake in the bank.
Expectations for a modest tapering of asset purchases tomorrow by the US Federal Reserve also took its toll on the w ider FTSE 100 Index, which closed 52.7 points lower at 6570.2.
A cut of 10 billion US dollars (£7.5 billion) is predicted in the quantitative easing (QE) programme, which will represent the first shift in the direction of policy since the Fed last raised interest rates in 2006.
The prospect of tapering from its current 85 billion US dollars has caused volatility in markets ever since Fed chairman Ben Bernanke suggested in May that asset purchases might be slowed later in the year, although Wall Street shrugged off the worries as the Dow Jones Industrial Average rose in early trading.
Figures showing UK inflation fell to 2.7% last month from 2.8% in July brought the pound back slightly from yesterday's nine-month high against the US dollar, at 1.59.
The prospect of lower inflation means it is unlikely the Bank of England will need to use the knock-out clause to break its pledge to keep interest rates at 0.5%.
Sterling largely held firm at 1.19 euros.
Among stocks, fellow state-backed lender Royal Bank of Scotland joined Lloyds in the red, down 4p at 362.5p after UBS downgraded the stock to neutral from buy.
But analysts expect the Treasury to achieve a rapid exit from Lloyds following strong demand for last night's share placing, which was the second-largest accelerated share sale behind Barclays in 2009.
Shares are also predicted to recover after today's initial falls and continue their ascent after more than doubling in the past year.
Elsewhere in the banking sector, Barclays fell 6.4p to 299p as it emerged that a paperwork error could cost it as much as £100 million due to the need for interest repayments to around 300,000 personal loan customers.
In other corporate news, shares in department store chain Debenhams were higher after it returned to sales growth and improved market share during its final quarter.
It said like-for-like sales rose 1.9% in the quarter to August 31, sending shares up 1.8p to 105p, d espite the company's warning that the market remains "highly competitive".
Meanwhile, transport rivals Go-Ahead and Stagecoach were around 2% higher after upgrades from broker JP Morgan. Shares rose 35p to 1601p and 5p to 335.3p respectively.
The biggest FTSE 100 risers were United Utilities 15.5p ahead at 703p, Severn Trent up 34p at 1792p, Randgold Resources 59p higher at 4545p and Reed Elsevier up 9.5p to 828.5p.
The biggest FTSE 100 fallers were Aggreko down 69p to 1580p, Lloyds Banking Group off 2.7p at 74.7p, Standard Life 10.2p lower at 343.9p and Meggitt 14.5p down at 549.5p.