A sharp sell-off in mining and banking stocks dragged the top shares further down from recent highs on Tuesday on worries that Greece's shock move to hold a referendum on a rescue deal may be rejected by the Greeks, who are angry at harsh cuts.

Figures showing big manufacturers in China, the world's second-largest economy and the top metals consumer, ran at their slowest pace in October since early 2009 added to investors' unease and hurt mining shares.

Analysts said a negative vote on the 130 billion euro (113 billion pound) bailout plan, struck last week by the euro zone leaders, might further deepen the two-year old debt crisis and result in a default by Greece, which in turn would affect the euro and threaten a fragile economic recovery.

The situation in Europe remains extremely fluid, with news of a potential Greek referendum now injecting huge uncertainty. Furthermore, events on the continent continue to overshadow the banking sector, whilst data from China is again weighing on the miners, said Keith Bowman, analyst at Hargreaves Lansdown.

In all, prospects for the global economy continue to hang in the balance. Hopes that the BRIC nations may eventually ride to the rescue persist, although for now, volatility continues to be the order of the day, he said, referring to Brazil, Russia, India and China.

British shares hit their highest in nearly three months late in October on hopes the euro zone deal would help resolve the crisis that has threatened economic growth, created political turmoil and raised unemployment and debt levels. A Greek referendum might jeopardise those plans and push the market further down, analysts said.

Whilst the referendum is certainly incredibly democratic, the sceptics amongst us will read into it as the Greek prime minister trying to backtrack on his original agreements and this could bring Greece closer to an eventual default, said Joshua Raymond, chief market strategist at City Index.

Miners <.FTNMX1770>, down 4 percent, featured among the top decliners, putting pressure on the FTSE 100 index <.FTSE> that was down 158.63 points, or 2.9 percent, at 5,385.70 by 11:40 a.m.. The index, which fell to its lowest since October 20 earlier in the session, has fallen nearly 9 percent so far this year.

Citigroup said mining companies were facing a perfect storm with falling commodity prices hitting revenue streams and costs rising based on resilient exchange rates and higher inflation.

Under current economic conditions, the mining sector is looking more fully valued, Citigroup said. We would recommend being more cautious on the sector on a three to six month view.

Banks, which generally suffer in a difficult economic environment, were the worst hit, with Britain's banking index <.FTNMX8350> slipping 4.2 percent. Royal Bank of Scotland dropped 5.4 percent, while Barclays was down 8.6 percent, also pressured by a rating cut by UBS.


Bill McNamara, technical analyst at Charles Stanley, said that the sell-off strongly suggested that traders were jumping ship at the first sign of a reversal.

That's hardly bull market behaviour, he said, adding the index might fall to a low of 5,310 -- a 50-percent retracement of the rally that began after the lows on October 4 and where its 50-day moving average now stands -- before finding some support.

Macroeconomic numbers came in mixed, providing little direction to jittery investors. A survey showed Britain's manufacturing sector shrank at the sharpest rate in over two years in October. However, the economy grew by 0.5 percent in the third quarter, driven by the strongest growth in business services and finance in four years.

Looking ahead, this could be the strongest GDP number we see for a few quarters as leading indicators are pointing to a meaningful slowdown. This latest number by no means signals that recessions fears have abated, Azad Zangana, economist at Schroders, said.

Risks are escalating as the European debt crisis appears to have taken a nasty turn. Greece is expected to vote in January, with a 'no' vote being linked to a Euro exit.

Among individual movers, G4S gained 1.6 percent in strong volumes after the British security firm pulled the plug on its planned 5.2 billion pound acquisition of Denmark's ISS after failing to secure shareholder support.

Bwin.party Digital Entertainment rose 10 percent after the online gaming company unveiled plans to partner with U.S. casino operators MGM Resorts International and Boyd Gaming subject to the legalisation of internet gambling in the United States.

(Editing by Jon Loades-Carter)