By Rebekah Curtis

LONDON (Reuters) - The leading share index skidded 2.6 percent by midday on Monday as financials were lashed by fears the fire sale of U.S. bank Bear Stearns BSC.N signalled the credit market crisis would claim more victims.

Alliance & Leicester ALLL.L and HBOS HBOS.L both slid more than 10 percent, while Royal Bank of Scotland (RBS.L: Quote, Profile, Research) and Barclays (BARC.L: Quote, Profile, Research) both lost nearly 8 percent.

Investors shunned the sector after JPMorgan (JPM.N: Quote, Profile, Research) announced a takeover of Bear Stearns at a rock-bottom price, and ahead of a set of key investment bank results due this week.

By 11:39 a.m. the FTSE 100 .FTSE was down 146 points at 5,485.7, hitting its lowest level since the end of January as Europe tracked steep falls in Asia and U.S. stock futures tumbled.

The index has shed 15 percent so far this year on investor fears of a possible U.S. recession and further credit-related writedowns.

In a shock move on Sunday, the U.S. Federal Reserve (Fed) cut its discount rate by a further quarter point to 3.25 percent and launched a new facility that would allow U.S. primary dealers, mainly investment banks, to tap the discount window in a tool not used since the Great Depression.

"The Fed's in a new phase now of making pretty unusual policy steps... It's bringing home to people just how serious the situation is," said Chris Iggo, a strategist at Axa Investments.

"The U.S. banking system's in a pretty precarious position at the moment," he said.