By Michael Taylor

LONDON (Reuters) - The blue-chip index fell for the third session in a row to end over 2 percent lower on Tuesday as credit fears and U.S. data dragged financials lower, while a sprinkling of bid activity kept a few stocks afloat.

The FTSE 100 .FTSE shed 129.8 points, or 2.4 percent, to 5,320.4 -- its largest one-day fall in over a month. The benchmark index is down 17 percent for the year to date.

Across the Atlantic, U.S. stocks lost over 1 percent to extend sharp declines overnight, after Barron's said the government may have no choice but to nationalise Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research). This could wipe out existing holders of the two companies' common stock and result in losses for other asset holders.

Former International Monetary Fund chief economist Kenneth Rogoff said the worst of the global financial crisis is yet to come and a large U.S. bank would fail in the next few months as the world's biggest economy hits further troubles.

UK banks accounted for over 47 negative index points, with Barclays (BARC.L: Quote, Profile, Research), Royal Bank of Scotland (RBS.L: Quote, Profile, Research), HSBC (HSBA.L: Quote, Profile, Research), HBOS HBOS.L, Lloyds TSB (LLOY.L: Quote, Profile, Research) and Standard Chartered (STAN.L: Quote, Profile, Research) down 4.3 to 7.4 percent.

"A lot of people have thought over the course of last few weeks that much of the bad news regarding markets is out in the public domain. That clearly is not the case," said Peter Dixon, UK economist at Commerzbank.

"We saw the comments from Rogoff, suggesting that a major U.S. bank could well go under. That just reawakens investors to the idea that we are by no means over the worst of the crisis."

Insurers were hurt by the knock-on effect, with Standard Life (SL.L: Quote, Profile, Research), Old Mutual (OML.L: Quote, Profile, Research), Prudential (PRU.L: Quote, Profile, Research), Aviva (AV.L: Quote, Profile, Research) and Legal & General (LGEN.L: Quote, Profile, Research) losing between 6.1 and 7 percent.