Lloyds was the weakest of the blue chips last night as traders, already wary of banking stocks owing to the impasse over the federal debt ceiling in the US, took note of some bearish comment from Royal Bank of Scotland, the other part-nationalised lender on the FTSE 100.
RBS analysts switched their stance on Lloyds to "hold" from "buy", saying that they saw little prospect of sustainable gains in the share price in coming months.
"Given what looks to us like an overambitious top-line strategy, a tough economic backdrop, regulatory uncertainty and limited repatriation of capital until 2015, we see little potential for the shares to achieve a sustainable re-rating in the next 12 months," they explained, lowering their target for Lloyds to 47p, against 80p previously.
Besides the negative comment, the stock was also pressured by the weakness in the wider sector, which lost ground amid concern about the debt crisis on the other side of the Atlantic. With the two houses of the US Congress and the White House still unable to come to an agreement on raising the country's credit limit, investors moved out of banks and financial companies.
Providing additional fodder for the bears was Seymour Pierce, which said upcoming banking results (the reporting round starts next week) were likely to prove disappointing, although it did add that this may already be reflected in sector share prices.
As a result, with the various factors weighing on market sentiment, Lloyds ended the session at 43.35p, down nearly 4 per cent or 1.65p, while Barclays was 4.9p lower at 223p. RBS was also held back, shedding 0.59p to 35.69p last night.
Overall, the tussle on Capitol Hill sent the benchmark FTSE 100 index down by 58 points to 5,815.19 , while the FTSE 250 was 63.51 points weaker at 11,552. The mood amongst traders was also dampened by the latest growth figures from the US Commerce Department, which showed that the world's largest economy had expanded at an annual pace of just 1.3 per cent in the second quarter after growing by a mere 0.4 per cent between January and March.
Few blue chips managed to book any meaningful gains, with Vodafone standing out as the most notable of those that did. The telecoms group rallied by 4 per cent or 6.6p to 172p as investors eyed the boost from the long-awaited decision by Verizon Wireless to pay a dividend to shareholders.
As a 45 per cent investor, Vodafone is in line for a £2.8bn boost when the payout is made at the end of January. Adding to the cheer for its investors, the UK group announced that, as a result, it would pay a special dividend of £2bn, or 4p per share, in February. The remainder of the funds will go towards cutting debt, Vodafone said.
Other risers included the oil giant BP, which was 2.2p better off at 461p on news that it had started sending workers back to three of its platforms in the Gulf of Mexico, as Tropical Storm Don looked set to skip the area."With the storm's westward movement, BP has determined that it is safe to begin remanning its three platforms that were evacuated," a BP spokesman said.
Back on the downside, the mining giant Anglo American was just behind Lloyds with a decline of 3.3 per cent or 98p to 2,900p after posting $6bn in operating profits for the first half, against market hopes of $6.3bn.
Much of the blue-chip mining sector was also behind, although there were some exceptions, the strongest being Kazakhmys at 1,348p, up 11p.
British American Tobacco was 1.3 per cent or 36.5p behind at 2,820.5p as news came that major tobacco companies, including BAT unit Imperial Tobacco Canada, had failed to convince the Canadian Supreme Court that the Government in Ottawa should be partly liable when it comes to health-related lawsuits.
"When Canada directed the tobacco industry about how it should conduct itself, it was doing so in its capacity as a government regulator that was concerned about the health of Canadians," the court said.
"Under such circumstances, it is unreasonable to infer that Canada was implicitly promising to indemnify the industry for acting on its request."
Among smaller companies, the video games retailer Game was held back, shedding more than 3 per cent or 1p to close at 28p amid worries about competition from US rival GameStop, which launched its UK online store this week.
Espirito Santo said that although "the immediate threat should not be overplayed", as GameStop is unlikely to be well known among consumers on this side of the Atlantic, Game continued to face challenges when it came to the UK trading environment.
"Picking up on commentary in the trade press, we think that there has not been any material pick-up in the UK games' market since we last heard from Game on 15 June," broker Espirito Santo explained, repeating its "sell" recommendation on the stock.
FTSE 100 Risers
Pearson 1,174p (up 35p, 3.1 per cent)
Publisher raises its full-year guidance after reporting a strong half-yearly performance.
International Airlines 237.3p (up 4.7p, 2 per cent)
Rises after saying that it swung to a profit over the first half of the year.
Inmarsat 540p (up 3p, 0.6 per cent)
The read-across from US partner LightSquared's deal with Sprint Nextel continues to boost sentiment.
FTSE 100 Fallers
Standard Chartered 1,558p (down 40p, 2.5 per cent)
Falls back with the wider banking sector as traders watch for developments on US debt talks.
HSBC 594.5p (down 12.3p, 2 per cent)
Falls with the wider sector; names Sean O'Sullivan as chief operating officer.
Tullow Oil 1,230p (down 19p, 1.5 per cent)
Oil comes under pressure from worries over US debt talks, and weak growth figures
FTSE 250 Risers
United Business Media 541p (up 27p, 5.3 per cent)
Events and publishing group posts results, cheers investors with improved outlook.
Renishaw 1,683p (up 69p, 4.3 per cent)
Arden Partners revises its stance on the engineering group's stock to "buy" from "add".
National Express 262.4p (up 1.1p, 0.4 per cent)
Nomura lowers its target for the transport group to 315p, but sticks with "buy" stance.
FTSE 250 Fallers
Travis Perkins 883.5p (down 44p, 4.7 per cent)
Builders' merchant and DIY retailer loses ground after posting half-yearly results.
Bellway 660p (down 12.5p, 1.9 per cent)
Under pressure along with the wider sector as the latest house prices report fails to lift sentiment.
Afren 140.3p (down 0.7p, 0.5per cent)
Like blue-chip peer Tullow, falls back as oil prices retreat on news from across the Atlantic.