Weakness in risk-sensitive commodity issues and banks dragged the FTSE 100 index lower on Wednesday, with concerns over the euro zone debt crisis ratcheted up as Italy's borrowing costs expanded to a record high.

Italy had to pay 6.47 percent on five-year bonds in an auction on Wednesday, up from a previous euro era record high of 6.29 percent in mid November, as neither last week's EU summit nor tough new austerity measures by the government of Mario Monti succeeded in restoring market confidence.

The FTSE 100 index <.FTSE> closed down 123.35 points, or 2.3 percent, at 5,366.80, having rallied 1.2 percent on Tuesday.

The FTSE 100 is in the process of recording its fifth ever loss for the month of December since being established as all the festive cheer is being sapped by the continued lack of a lasting resolution to the European debt crisis, said Angus Campbell, head of sales at Capital Spreads.

Mexican silver miner Fresnillo was the top FTSE 100 faller, down 11.1 percent, with the stock trading ex-dividend, and with its falls exacerbated by news that FTSE Group plans to increase the minimum free float requirement to be included in its indexes to 25 percent, up from 15 percent.

Fresnillo and fellow commodity blue chips Essar Energy and ENRC will all be affected by the FTSE rule change, together with soon to be blue chip Russian miners Evraz and Polymetal
, and FTSE 250 firm Ferrexpo , all of which were lower.

The affected firms will have a 24 month window to increase their shares that are freely tradeable to the new level.

Overall miners <.FTNMX8350> and integrated oils <.FTNM0530> were the two worst performing sectors on Wednesday, having been Tuesday's top gainers, with copper miner Antofagasta 5.0 percent lower, and oil major BP down 2.5 percent.

U.S. blue chips <.DJI> were 1.1 percent lower by London's close, hit by the Federal Reserve's decision on Tuesday not to fuel the market with more cheap money, and its comment that Europe's debt crisis remained a threat to economic recovery.

British banks <.FTNMX8350> were also under pressure reflecting concerns over their debt exposure to Europe.

Goldman Sachs said while the ECB's latest liquidity measures -- reserve ratio cut, three-year refinancing and expansion of collateral -- substantially enhanced the sector's resilience and guarantee bank funding stability in 2012/13, it keeps a neutral sector view, given euro zone developments.

Lloyds shed 2.6 percent. The bank named the Co-Operative Group as the preferred bidder for its European Commission-mandated branch divestment, and also said Antonio Horta-Osorio will return to the position of chief executive on January 9 after independent medical advice said he had made a full recovery after being on sick leave from stress.


Retailers were under pressure as leading investment banks forecast more gloom for the sector in the face of Europe's debt crisis, austerity measures and flagging consumer sentiment.

Tesco fell 0.8 percent as ING cut its rating to sell from buy, while Marks & Spencer fell 2.3 percent as the broker downgraded it to sell from hold.

Citigroup said a combination of severe economic conditions and unsustainable industry trends meant EPS contraction would not be an unreasonable scenario for food retailers in 2012/13.

And JPMorgan said investors should expect more retail pain over the Christmas period.

But Wm Morrison Supermarkets bucked the trend, up 0.3 percent, the sole FTSE 100 gainer, as ING upped its rating to buy citing its defensive qualities.

Among the mid caps <.FTMC>, fashion retailer SuperGroup was the top performer, ahead 7 percent after first-half results which prompted Seymour Pierce to repeat its buy rating.

The market in general needs some positive catalyst to move to the upside as there is still cash on the side lines that investors want to put to use on the expectation of a year-end rally that seems not to be materialising, but there is time yet as the wait for the bazooka continues, said Atif Latif, a director at Guardian Stockbrokers.

(Editing by Jon Loades-Carter)