The FTSE 100 index was essentially flat early in the London session, but proceeded to drop as much as 40 points, or 1.4 percent, after weaker than expected U.K. retail sales were announced at 9:30 am in London.

December sales rose 0.3 percent from November. Sales missed expectations of a 1.1 percent increase, according to data compiled by Bloomberg. The report showed the December figure was 2.1 percent higher year-on-year. Food stores sales increased 2.8 percent while non-food stores rose 0.7 percent year-on-year.

The pound began to drop against the dollar around 9:30 a.m. in London. It briefly rallied an hour later and then continued to drop. GBP/USD is trading at $1.6101. The pound lost as much as 157 pips against the dollar from the 9:30 am opening price.

Among the biggest losers of the FTSE 100 were financial firms. Lloyds TSB, Aviva, Legal & General, and ICAP are all down more than 3 percent. Royal Bank of Scotland is down 4.5 percent and Barclays is down 5.92 percent.

Financial firms in the U.K. were weighed down by a series of anti-bank proposals from President Barack Obama. The U.S. president first proposed a bank fee a week ago and announced a proposal yesterday to further restrict banks.

According to Reuters, the U.K. Labour Party and Conservative Party support Obama's plans. Last December, U.K. Chancellor of the Exchequer Alistair Darling announced a onetime 50 percent tax on bank bonuses.

The FTSE 100 rallied from its low of 5,253.04 to trade at 5,298.32. It is down 36.78 points or 0.69 percent for the day.