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Shares in Royal Bank of Scotland shed 3.3 percent, heading the FTSE100 fallers board, with traders citing a combination of concerns overits role in an industry-wide probe into the alleged manipulation of Liborinterest rates and broker downgrades.
RBS, majority owned by the British government after it was bailed out withtaxpayers' money during the 2008 financial crisis, underperforms a 0.2 percentrise by the blue chip index..
Rival Lloyds Banking Group, which was also part-nationalised by theBritish government after a similar bailout during the credit crisis, falls 1.3percent.
Traders cite a Wall Street Journal report that RBS is close to a settlementwith U.S. and British authorities over claims that some of its employeessubmitted false Libor rates as a reason for the stock's fall, adding that RBShas had a good run since the start of 2013.
"It's put the word 'LIBOR' back in front of the banks and people are usingit as an excuse to take profits," says Central Markets chief strategist RichardPerry.
Banking shares across Europe rallied in the second half of 2012, after theEuropean Central Bank (ECB) pledged to do "whatever it takes" to protect theeuro currency from the region's sovereign debt crisis, and RBS is up by nearly10 percent since the start of 2013.
Other traders cite the impact of downgrades by Goldman Sachs and EspiritoSanto Investment Bank as also weighing on RBS.
Goldman cut its stance on RBS to "sell" from "neutral" late on Monday, whileEspirito Santo downgrades both RBS and Lloyds to "sell" from "neutral" in a noteon Tuesday.
Espirito Santo says both RBS and Lloyds might have to raise capital fromdilutive equity issues in order to meet tough new capital requirements fromregulators.
"With Lloyds most impacted if regulators moved to standardised credit risksand RBS the weakest capitalised UK bank, dilutive equity raisings cannot beruled out," the broekr says.
Reuters messaging rm://sudip.kargupta.thomsonreuters.com@reuters.net
