The leading share index ended down 0.7 percent on Tuesday, with banks worst hit as U.S. and European markets were knocked by fears that strong global growth would force interest rates higher around the world.
Banks took about 19 points off the index, with HBOS , the biggest mortgage lender, losing 3.6 percent, as it revealed its share of new mortgages had dropped and it had seen a rise in requests for refunds on bank charges.
Also in the sector, Royal Bank of Scotland fell 2.7 percent, Lloyds was off 1 percent, and Northern Rock shed 2.8 percent.
Investors were jittery after Bank of England Governor Mervyn King said late on Monday that interest rates may need to rise again if signs of price pressures and capacity constraints remain.
The Office of National Statistics said consumer prices rose 0.2 percent last month, taking the annual rate down to 2.5 percent from 2.8 in April -- the lowest since October 2006 but still firmly above the central bank's 2 percent target.
The FTSE 100 ended down 47.1 points, or 0.72 percent, at 6,520.4, as the previous week's concerns over rising bond yields, which stoked fears of further rate tightening from central banks around the globe, returned to spook investors.
(Central banks) always tend to overshoot somewhat, said Chris Iggo, strategist at AXA Investments.
You'd be brave to bet against that at this stage, he added.
It's going to be an important period in the next few months in the UK. Because we are going to get some better inflation numbers.
Topping the FTSE charts, shares in engine maker Rolls-Royce added 3.4 percent as traders cited a series of positive broker notes ahead of the International Paris Air Show next week, including one from Merrill Lynch on market share.
The world's biggest platinum distributor, Johnson Matthey , added 1.8 percent and hit an all-time high after an upbeat note from Merrill Lynch boosted the shares, traders said.
On the downside, oil stocks weighed on the index as crude oil slid below $69 a barrel amid macro-economic concerns and as energy investors focused on rising shipments of North Sea crude and improving U.S. gasoline stocks.
Royal Dutch Shell shed 1.8 percent, while its rival BP also fell.
Among midcaps, waste firm Biffa Plc dropped 9 percent following results and after Citigroup cut the stock's price target.
Biffa posted an 11 percent rise in annual profit on Tuesday but said it saw more modest growth in its Resource Recovery and Landfill unit in the current financial year.