By Dominic Lau

LONDON (Reuters) - The leading share index sank 3.9 percent on Monday to hit its lowest closing level since late 2005 after the fire sale of U.S. bank Bear Stearns BSC.N sparked fears of more casualties from a global credit crisis.

The FTSE 100 .FTSE fell for the third straight session to close down 217.3 points at 5,414.4. The benchmark index has lost 16 percent so far this year on fears of a looming U.S. recession.

"My fear is that the speculation that another major investment bank might be in line to encounter problems ... are going to perpetuate (themselves) in the market for a while," said Tim Whitehead, head of portfolio services at Redmayne-Bentley.

"As a consequence I am not really optimistic of a quick recovery in the market."

"The Federal Reserve's interest rate cuts that are widely mooted for this week are properly factored into the Dow already and therefore the scope for manoeuvre is likely to be impeded."

The Fed is due to announce a rate decision on Tuesday.

Banks were the worst hit 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 U.S. investment bank results due this week.

Royal Bank of Scotland (RBS.L: Quote, Profile, Research) fell 8.7 percent, Barclays (BARC.L: Quote, Profile, Research) dropped 9.4 percent, while HBOS HBOS.L slid nearly 13 percent and Alliance & Leicester ALLL.L lost 7.2 percent.