Britain's top share index fell on Monday as the threat of euro zone debt contagion prompted investors to sell out of riskier commodity and banking assets, amid worries about a Greek default and Italy's predicament.

London's blue chips <.FTSE> shed 1.6 percent or 87.06 points to 5,440.10 by 9 a.m., extending Friday's 0.3 percent slide, which left the index nursing a weekly loss for the first time since late September.

Investors remained to be convinced that Greece will avoid defaulting despite Prime Minister George Papandreou sealing a deal with the opposition on a crisis coalition to approve an international bailout.

Athens must get the next 8 billion euro tranche of aid before mid-December, if it is to stave off bankruptcy.

Meanwhile, Italian Prime Minister Silvio Berlusconi faces a crunch vote on public finances on Tuesday, with party rebels threatening to bring down his government in a backlash over its failure to adopt reforms to defuse a dangerous debt crisis.

Economy Minister Giulio Tremonti was forced to deny reports that he had forecast a catastrophe on financial markets this week unless Berlusconi stepped down.

Greek and Italian political uncertainty is extreme, forcing many to believe this is a game changer, JP Morgan analyst Mislav Matejka said.

Concerns over Italy's plight was reflected most sharply in its benchmark 10-year bonds yields, which climbed to 6.56 percent, from 5.88 percent on October 27 when the EU bailout package was agreed.

Matejka said: Our confidence in 'buying the dips' strategy has (been) reduced by this unhealthy backdrop, but the already depressed sentiment, intense pressure on policymakers to deliver further support, low valuations and resilient global activity force us not to abandon the constructive view.

He said equities will move up further on a 6-12 month horizon, and sees upside in cyclicals; autos, mining, construction materials, tech, and insurance and value stocks.


Banks <.FTNMX8350> and miners <.FTNMX1770> were sharply lower as investors ditched risky equities.

Barclays fell 3.7 percent and Royal Bank of Scotland shed 3.5 percent. Both banks said in separate updates last week that they had heavily reduced their euro zone debt exposure.

Lloyds Banking Group , which reports on Tuesday and whose chief executive is on sick leave due to stress, was down 4.5 percent.

Integrated oils <.FTNMX0530> fell too, with Heavyweight oil major BP dipping 1.9 percent after the firm said announced the weekend the collapse of its $7 billion deal to sell its stake in South America's Pan American Energy.

BP, which announced recently it was likely to increase its dividend may now struggle to make good on its commitment, after the deal fell through.

Essar Energy fell 3.9 percent after the firm reported an inline update with Deutsche Bank highlighting risks around securing domestic coal for its power stations, although it says the shares are materially undervalued.

Elsewhere, Weir Group was the top faller on the FTSE 100, shedding 6.1 percent as the engineer's positive interim management statement prompted some profit-taking, with the stock up almost 40 percent since the start of October.

Highlighting nervousness amongst UK corporates, a report on Monday showed Britain's economy is at serious risk of contracting in the current quarter as services firms falter.

(This story corrects in 12th and 13th paragraphs of Nov 7 story to show CEO of Lloyds is on sick leave, not RBS)

(Editing by Jon Loades-Carter)