FTSE falls 2.4 percent by midday

By 11:22 a.m., the FTSE 100 was down 133.2 points at 5,492.7, giving up a 1.7-percent gain on Monday, and continuing to trade at levels last seen in mid-March.

The benchmark index lost nearly 13 percent from January to June after five consecutive years of gains. The market gained 6.2 percent in January to June 2007.

"We are in a bear market and quite frankly anything that can be trashed, they are trashing it, good or bad it doesn't matter. They are just selling everything today," a trader said.

Oil shares also weighed heavily on the index following recent gains, despite crude prices trading near a record high above $143 a barrel.

BP lost 1.2 percent, Royal Dutch Shell dropped 1.4 percent, gas producer BG Group slipped 2.1 percent and Tullow Oil shed 3.1 percent.

In the mining sector, Anglo American, BHP Billiton, Rio Tinto, Xstrata, Vedanta Resources, Lonmin and Eurasian Natural Resources fell between 1.9 and 4.7 percent.

Banks, however, were the biggest weighted losers on the index after a survey showed house prices fell for the eight straight month in June to stand more than 7 percent below the peak hit last year, which is likely to fan fears the market is on the verge of a crash.

Barclays, Royal Bank of Scotland, HBOS, HSBC, Lloyds TSB and Standard Chartered were down 2.5 to 5.2 percent.

Shares in Swiss bank UBS fell to a 10-year low amid speculation it will announce more write downs for the second quarter, potentially of around $5 billion (2.5 billion pounds), while Germany's Deutsche Bank sagged on worries of more write downs and the threat that revenue will remain under pressure for many months due to the credit crunch, dealers said.

Overnight, Lehman Brothers fell nearly 11 percent on rumors that the U.S. investment bank would be bought for $15 a share, a price well below market levels, as well as rumors of discouraging remarks from the bank's chief executive.

"It's a pretty nervous start to the second half of 2008. Worries over bank write downs just won't go away," said Keith Bowman, an analyst at Hargreaves Lansdown.

The property price data also weighed on housebuilders, with Taylor Wimpey, Persimmon, Redrow, Bovis Homes and Bellway all taking a whipping.

Building materials distributor Wolseley fell 6.6 percent, also weighed by a price target cut from Goldman Sachs, while Europe's biggest home improvements retailer Kingfisher lost 5.8 percent.

Barratt Developments, however, advanced 1.7 percent after the Daily Telegraph said it was close to securing a rescue refinancing with lenders that will relax its banking covenants and help it cope with the housing market downturn.

The manufacturing sector contracted last month at its sharpest rate since December 2001 as output and new orders fell at their fastest rate in almost a decade, according to a survey.

BT Group, Reckitt Benckiser and British Energy were the only gainers on the FTSE 100.