Banks led Britain's top share index lower early on Monday having ended the previous session at a fresh 2012 high, while Chinese economic data raised fears of slowing demand from the world's top consumer, which proved a drag on miners.

London's blue-chip index <.FTSE> fell 32.54 points, or 0.6 percent, to 5,933.04, by 0901 GMT.

Banks <.FTNMX8350>, which gained more than 5 percent last week, were the top fallers as the sector neared technically overbought levels according to its relative strength index.

Sector sentiment was dampened as accountancy firm KPMG warned Britain's banks face more pressure on profits, partly because of increasing regulation costs, and many will have to cut more jobs.

Meanwhile Barclays Capital said it expected investment banking earnings this quarter to bounce back from weak trading in the second half of last year, but sees full-year earnings down as much as 20 percent.

Jimmy Yates, head of UK equities at CMC Markets, said: Given the rally the banks enjoyed over the past week, it looks like investors have taken this opportunity to bank some gains on a sector which is up more than 20 percent in 2012.

In an equity strategy note, JPMorgan Cazenove was bullish on banks and insurers, saying the expectation of a move up in bond yields, supported by a flood of liquidity from central banks, is likely to be welcomed by equities, at least initially, favouring cyclical and financials, with telcos, pharma and utilities all set to underperform.

JPMorgan Cazenove, however, reduced its rating on the miners <.FTNMX1770>, which fell 0.6 percent, to neutral on valuation grounds.

(The) sector has outperformed year-to-date but increasing China volatility warrants a cut. Rallies driven by cuts in RRR (banks reserve rate requirements) should be used as opportunity to reduce into strength, the investment bank said in a note.

RISK APPETITE

Miners fell in tandem with base metal prices, which waned after indications of a weakening property market in China added to worries about demand from the top consumer of the metal.

Typically as risk appetite has waned it's the usual suspects - the miners and banks - which have borne the brunt of the selling, a London-based trader said.

Elsewhere among commodity-linked stocks, Tullow Oil fell 1.5 percent as UBS cut its recommendation on the oil explorer to underweight from neutral on valuation grounds.

We see ample exploration upside already priced in to the shares. We believe it is difficult to see dramatic NAV expansion at this point. We think that downside risks may present themselves in the form of potential hold-ups to development which are largely out of Tullow's control, UBS said in a note.

On the upside, Aberdeen Asset Management , newly promoted to the FTSE 100, added 0.5 percent.

BT gained 0.7 percent as the Sunday Times reported the firm is preparing to put up to 1.5 billion pounds into its pension fund in an effort to tackle a huge shortfall in the scheme - and clinch a multi-million-pound tax credit.

The same paper also said Vodafone , up 0.8 percent and the top FTSE 100 riser, could reap a 1 billion pound tax windfall if the mobile phone group wins its battle for control of Cable & Wireless Worldwide .

And on the FTSE 250 <.FTMC>, Misys jumped 6.8 percent after the British software firm warned its largest shareholder and possible suitor ValueAct that the 350 pence a share deal it had agreed with private-equity firm Vista Partners was likely to be the best available.

(Editing by David Holmes)