FTSE falls 2.2 pct as bears reign

By Dominic Lau

LONDON (Reuters) - The FTSE 100 .FTSE fell 2.2 percent on Thursday to close in bear-market territory -- down 20 percent from a multi-year peak a year ago -- as oil and banks weighed on the index.

The FTSE 100 ended down 122.8 points at 5,406.8, reversing the previous session's gains and shrugging off the Bank of England's expected decision to hold rates unchanged, after gaining 1.6 percent on Wednesday.

The benchmark index has fallen 20 percent from the level of 6,754.1 on July 13, 2007 and has lost 16.3 percent so far this year.

"The equity markets are basically tanking on the back of declining earnings prospects, which in turn is a function of slowing economy both at home and aboard," said Peter Dixon, UK economist at Commerzbank.

"Irrespective of what the Bank of England does, it is not going to lead to a major correction in the equity markets anytime soon. You can argue theoretically that a rate cut will give something of a lift ... but if the impact of falling earnings-growth estimates is faster than the pace of rate cuts, it's not going to help."

Heavyweight oil shares suffered as crude prices remained below recent record highs despite trading up to above $137 a barrel.

BP (BP.L) dropped 2.1 percent, Royal Dutch Shell (RDSa.L) lost 2.5 percent and gas producer BG Group (BG.L) shed 3.7 percent.

Banks were another standout losing sector, with Barclays (BARC.L), HSBC (HSBA.L), Royal Bank of Scotland (RBS.L) and Lloyds TSB (LLOY.L) losing 1.4 to 4 percent.