The top shares closed lower on Wednesday as banks fell out of favour after brokers urged caution on the sector after recent gains, while poor growth in the UK highlighted the challenges facing corporates to meet earnings expectations.

London's blue chip index <.FTSE> closed down 28.90 points, or 0.5 percent at 5,723.00, as the FTSE 100 retreated from six-month highs hit on Monday, but held above 5,700 - the level it had struggled to close above since last August.

Banks <.FTNMX8350> were the main fallers, having risen around 15 percent early in 2012, compared with about a 3 percent gain on the UK's benchmark index, as analysts at UBS and Macquarie cast doubt over the sustainability of the recent rally.

Royal Bank of Scotland shed 1.1 percent as UBS cut its rating on the majority state-owned lender to neutral from buy.

UBS said worries over earnings, its exposure to Ireland and the challenging sale of noncore assets would see pressure mounting on RBS's shares in the run-up to results due on February 23.

Macquarie also downgraded its recommendation on RBS, to underperform from neutral, in a broader note on banks.

Peers Lloyds Banking Group and Barclays fell 2.3 and 0.5 percent as Macquarie compared the current European crisis with that in Japan in the 1990s and concluded the recent rally is an opportunity to take profits.

The broker said among problems facing banks is that they cannot rely on the provision of liquidity alone, through the European long-term refinancing operation, to solve fundamental solvency issues.

It said the banks need more capital and for Greece to come to an agreement with its private creditors to solve its debt problems, something which is proving difficult, after a number of false dawns, to boost confidence in lenders.

Adding to the downbeat sentiment on the sector, JPMorgan downgraded U.S. peers Goldman Sachs and Morgan Stanley, citing ongoing uncoordinated regulatory headwinds.

Worries over their outlook hit integrated oils <.FTNMX0530> as JPMorgan said the sector was set for some weak earnings in its fourth-quarter results preview.

The bank cited a profit warning from Chevron, financial insolvency at a Petroplus, combined with very cautious pre-results guidance, as reasons for its downbeat mood.

Royal Dutch Shell and BP shed 1.6 and 0.6 percent, respectively, as JPMorgan cut its 2012/13 earnings estimates for both firms by up to 10 percent.

EARNINGS WEAKNESS

Fears over companies' earnings outlook weighed on the mobile telecoms sector, with heavyweight Vodafone shedding 1.0 percent after Verizon, with which Vodafone has a wireless venture, warned it may miss analyst expectations for 2012 earnings.

World No.1 mobile equipment maker Ericsson also ladled on the pressure after missing profit and sales forecasts, blaming the global economic slowdown.

According to Thomson Reuters Starmine data, 57 percent of U.S. companies to have reported so far in the fourth-quarter have missed expectations.

And the austere economic backdrop which is hampering corporate earnings shows no signs of lightning up.

Britain's economy may have entered a mild recession in the last three months of 2011,data revealed, rubber-stamping the fears of the International Monetary Fund, which cut global growth forecasts on Tuesday, that governments racing to cut deficits too quickly were putting the global economic recovery at risk.

Retailers fell after the data on expectations that margins and earnings will come under further pressure in 2012, with Tesco and Marks & Spencer off 2.1 and 0.5 percent, respectively, as austerity measures force consumers to hoard cash rather than spend it, stunting growth.

Psychologically, these figures aren't great, but conditions could improve in the second half of 2012 if the outlook for Europe improves and the UK consumer benefits from moderating inflation, said David Miller, Partner at Cheviot, which has about 3.5 billion pounds of assets under management.

Broader losses were tempered, however, as investors waited for the conclusion of a two-day policy meeting of the U.S. Federal Open Market Committee, expected to result in forecasts showing interest rates will be near zero for at least two more years.

Lower interest rates for longer are of benefit to equities which can offer higher returns in comparison, with dividends on the FTSE 100, for instance, yielding more than 4 percent, while interest rates on cash are around 0.5 percent and the yield on UK gilts close to 2 percent.

The weak economic recovery also opens the door for further quantitative easing, which is widely expected in the UK in February and would provide the market with more cheap cash, weakening the currency but boosting liquidity to fuel growth.

Among the FTSE 100 risers, Ashmore rose 4.2 percent after Barclays Capital upgraded the stock to overweight from equal weight, citing an improving performance at the group's emerging market debt fund at a difficult time for UK asset managers.

And chip designer ARM Holdings rose 3.0 percent after its U.S. customer Apple's fourth-quarter results blew past expectations.

(Written by David Brett; Additional reporting by Tricia Wright; Editing by Hans-Juergen Peters)