LONDON, March 2 - Britain's leading share index fell 3.6 percent early on Monday, extending the previous session's sharp fall, with HSBC leading banks lower after it offered a deep discount rights issue.

By 0838 GMT, the FTSE 100 .FTSE was down 138.86 points at 3,691.23, after losing 2.2 percent on Friday. The UK benchmark had fallen 7.7 percent last month and is down more than 16 percent for the year after tumbling more than 31 percent in 2008.

Banks took the most points off the index as HSBC (HSBA.L), Europe's biggest bank, sank 9.1 percent after it reported an 18 percent fall in 2008 adjusted pretax profit and announced a cut in dividend and a deeply discounted rights issue to raise about 12.5 billion pounds ($17.75 billion).

Royal Bank of Scotland (RBS.L), Barclays (BARC.L), Lloyds Banking Group (LLOY.L) and Standard Chartered (STAN.L) lost between 6 and 15.1 percent.

The capital rising from HSBC is obviously a major market focus, said Darren Winder, equity strategist at Cazenove. But more generally it is the weakness of the U.S. market from Friday that is weighing heavily on the markets.

The big picture is still one of a profit picture which is under strong downward pressure and people are finding it very difficult to get comfortable with valuations against that sort of backdrop.

Asian shares fell nearly 4 percent on Monday under pressure of mounting evidence of a deepening global downturn and fears about the ballooning costs of saving struggling U.S. and international financial institutions. U.S. stocks also slipped on Friday.

Insurer AIG (AIG.N) was set to take a $30 billion lifeline from the U.S. government, continuing a trend of governments bailing out financial institutions brought to their knees by a credit market crisis.

In the UK, Prudential (PRU.L), Old Mutual (OML.L) and Aviva (AV.L) dropped 4.8 to 7.8 percent.

Amlin (AML.L), however, advanced 1.1 percent after the insurer posted a big fall in its annual profit, hit by hurricanes and lower investment returns, but lifted its dividend and said the outlook for underwriting was improving.

House prices in England and Wales fell by 0.8 percent in February to stand 10 percent lower than a year ago, the biggest annual fall since property data company Hometrack started its monthly survey in 2000.

Heavyweight oil producers also languished, tracking softer crude prices CLc1. BP (BP.L), Royal Dutch Shell (RDSa.L), BG Group (BG.L), Cairn Energy (CNE.L) and Tullow Oil (TLW.L) sagged 2.6 to 3.5 percent.

Weaker metal prices weighed on mining stocks, with BHP Billiton (BLT.L), Rio Tinto (RIO.L), Anglo American (AAL.L), Xstrata (XTA.L), Kazakhmys (KAZ.L) and Vedanta Resources (VED.L) down between 4.6 and 8.3 percent.

The Australian government said it would take its time before deciding on China's planned $19.5 billion investment in Rio Tinto.

Pearson (PSON.L) slipped 2.6 percent after the publishing group posted a 24 percent rise in 2008 adjusted earnings per share thanks to a strong performance at its education unit, and said it expected to either match or better that in 2009. (Additional reporting by Jon Hopkins; Editing by Jon Loades-Carter)