Britain's top share index fell back after a volatile session on Wednesday, swinging back from early strong gains in low volumes, with banks seeing gains eroded, although Lloyds Banking Group was boosted by a broker double upgrade.

At the close, the FTSE 100 index was down 29.86 points, or 0.6 percent at 5,389.74, reversing a chunk of Tuesday's 1.0 percent advance.

The index ended not far from the session low of 5,371.65 having hit a peak for the day at 5,479.19, with volumes around 85 percent of the 90-day moving average.

Banks <.FTNMX8350> ended lower as a sector, dragged back by big falls in global heavyweight HSBC and emerging markets specialist Standard Chartered , down 0.8 percent and 0.2 percent respectively.

News that lenders snapped up the European Central Bank's offer of three-year loans on Wednesday, taking nearly 490 billion euros (409.71 billion pounds), well above the 310 billion euros forecast in a Reuters poll, had an initial positive reaction.

It seems the sheer amount of money demanded by banks has shocked investors. Banks can borrow from the ECB at 1 percent and then buy various Government debt ranging from 3 percent-6 percent yields, so no wonder so much money has been taken up by this move from the ECB, said Simon Furlong, Trader at Spreadex.

However the stakes are high. If European countries do start to default then Europe could see an unprecedented financial meltdown, Furlong added.

Lloyds Banking Group , however, was the top FTSE 100 riser, up 5.5 percent as Exane BNP Paribas upgraded the UK lender to outperform from underperform on valuation grounds.

That move provided support to other domestic British banks, with Barclays and Royal Bank of Scotland up 0.3 percent and 0.8 percent respectively.


Among other blue chip gainers, building products firm Wolseley and recently-promoted Irish peer CRH added 2.1 percent and 2.6 percent respectively, boosted by further upbeat data on the U.S. housing market.

After strong U.S. housing starts data on Tuesday, sales of previously-owned homes surged in November, although revisions to data for the last four years showed the recession in the housing market was deeper than previously thought.

In spite of the data, U.S. blue chips <.DJI> were down 0.5 percent by London's close, also falling back after posting hefty gains on Tuesday, while the tech-laden Nasdaq <.IXIC> dropped 1.8 percent weighed by disappointing results from Oracle.

After the U.S. close on Tuesday, Oracle saw its earnings fall short of Wall Street forecasts for the first time in a decade.

European tech stocks suffered in tandem with the Oracle news, with British blue chips Sage and ARM Holdings down 2.4 and 2.0 percent respectively,

Elsewhere among the FTSE 100 fallers, Essar Energy was the biggest faller, down 3.4 percent after announcing its chairman was stepping aside temporarily following allegations by India's central bureau of investigation relating to the extent of the equity holding of Essar in loop telecom limited.

And blue chip retailers were unsettled by further depressing news on the high street in a crucial week for the sector ahead of the holiday break, with Marks & Spencer and Sainsbury both down around 2.0 percent.

Small cap chocolate producer and retailer Thorntons was the latest high street casualty, plunging 37.5 percent after issuing a profit warning.

The euphoria has proved to be short-lived ... We are however avoiding any signs of a rampant sell-off for now and the expectation is that volumes will slow sharply over the next day and a half, said Yusuf Heusen, Sales Trader at IG Index.

Volatility is likely to remain though, and with shares relatively depressed, some pre-Christmas bargain hunting wouldn't cause much surprise, Heusen added.

(Editing by Jon Loades-Carter)