FTSE suffers worst quarter in nine years

People walk up stairs inside the London Stock Exchange in London May 10, 2011.

LONDON (Reuters) - The FTSE 100 fell on Friday to register its biggest quarterly loss since 2002, with investors' confidence battered by fears of a global recession and a deepening euro zone debt crisis.

Banks were the worst performing sector on Friday, reversing a recent rally, led by emerging markets lender Standard Chartered, down 5.2 percent, while global heavyweight HSBC dropped 3.1 percent.

Hong Kong shares also slumped on Friday led by mainland banks and developers on fears that a property market correction in China could trigger problems for banks, particularly those with higher exposure to informal lending activities.

The UK benchmark ended down 68.36 points, or 1.3 percent, at 5,128.48 on Friday, a grim end to a quarter in which the index sank 13.7 percent, wiping 218 billion pounds off its value.

The index is down 13.1 percent in the year-to-date, having gained 9 percent in 2010.

The sell-off in the third quarter was precipitated by the dual concerns that the United States could lapse into another recession, and that the euro zone debt crisis could spark a repeat of the 2008 credit crunch.

In evidence of heightened anxiety, the FTSE 100 volatility index leapt 133 percent in the quarter, as investors latched onto any action from policymakers that could help the debt crisis, only to go into shock over obstacles that emerged.

Andrew Bell from Witan reckons a lot of bad news has now been discounted, and said there are increasing signs the euro zone is aware of the need for radical action.

"Investors worry that any policy moves will be too late to prevent a banking-led recession but if common sense rules this brinkmanship will result in a last-minute deal which enables growth to recover in 2012," Bell, chief executive of the 1.1 billion pound Witan Investment Trust, said.

"The problem is that the political machinery moves according to something slightly faster than a geological time clock whereas the markets have the time horizon of a small fish being chased by a pike."

Miners fell on Friday after China's manufacturing sector contracted for a third consecutive month in September, an indication the world's second-largest economy is not immune to global economic pressures.

Traders pointed to anxiety ahead of official Chinese PMI data, to be released on Saturday. This may show a pickup in factory activity though input prices will be closely watched for inflationary clues.

Will Hedden, sales trader at IG Index, said a negative figure could see the FTSE 100 test the 5,000 level -- the bottom of a trading range seen over the last few weeks.

Luxury goods firm Burberry shed 2.3 percent, extending the previous session's drop following weakness in U.S. peers, as investors worried about the sector's big exposure to China.

Intertek dropped 9.5 percent, the biggest faller, as UBS cut its rating for the testing equipment firm to "sell" from "neutral," in a sub-sector review, which concluded that testing is "resilient, but not immune to slowdown."

Buyers came in for stocks perceived as defensive, with drug firm Shire, and water companies United Utilities and Severn Trent among the top FTSE 100 gainers, up 0.7-1.5 percent.

In an indication some investors are pricing still more downside risk into the market, good demand for put options was seen over the majority of the week, according to Atif Latif, director of equities and derivatives at Guardian Stockbrokers.

(Additional reporting by Jon Hopkins; Editing by Erica Billingham)