FTSE falls as credit fears hit banks

By Amanda Cooper

LONDON (Reuters) - The leading share index fell on Friday, breaking a six-day stretch of gains as concern about the impact of the credit crunch and a slowing economy weighed on banks.

The FTSE 100 index fell 20.9 points, or 0.3 percent to 6,476.9 on its last full trading session before the end of the year, but still rallied for a second week in a row.

The benchmark index, which will have shorter trading hours on New Year's Eve on Monday, has gained 4 percent this year, compared with a nearly 11 percent gains in 2006, making 2007 its weakest year since 2002.

Banks were the top negative weight on the index after another round of weak U.S. data and warnings from Goldman Sachs on Thursday of more big writedowns on Wall Street heightened investor concern for this sector.

Financials have ranked among the worst performing sectors this year as the meltdown in the U.S. housing market triggered one of the worst global liquidity squeezes in years and hit banks' balance sheets.

"As far as the markets are concerned, 2007 will be remembered for the collapse of a bubble in financial sector valuations. Without that, the year would have been a pretty good one," Jacques Chahine at Factset said in a note.

A sharp drop in interbank lending rates offered little support to the broader market. One-month sterling LIBOR rates have now fallen to their lowest in a month, while three-month rates have dropped back to the pre-credit crisis levels of this summer.

Barclays, Royal Bank of Scotland, HSBC, HBOS, Standard Chartered and Alliance & Leicester were down between 0.3 and 1.1 percent.