FTSE down 0.7% as banks fall on Lehman funds

By Dominic Lau

LONDON (Reuters) - Britain's top share index fell 0.7 percent by late morning on Thursday ahead of the Bank of England's interest rate decision and dragged by banks after Lehman Brothers LEH.N said it had liquidated three of its funds.

By 0955 GMT, the FTSE 100 .FTSE was down 38.7 points at 5,945.2, also weighed by miners on worries about economic growth.

"The BoE is being overshadowed by a combination of rumours to the downside with the potential of more writedowns ... and apparently Lehman liquidating some funds," said Martin Slaney, head of derivatives at GFT Global Markets.

"You've got oil higher now, back up again. Put it altogether it has been a rapid drift to the downside," he said.

Miners were the biggest drag on the index after BHP Billiton (BLT.L: Quote, Profile, Research) said it was not aware of any plan by China to buy a stake in the company, while the Australian government said it would look closely at any moves by Chinese entities to buy shares in BHP. The world's biggest miner fell 4.4 percent.

Elsewhere in the mining sector, Rio Tinto (RIO.L: Quote, Profile, Research), Lonmin (LMI.L: Quote, Profile, Research), Kazakhmys (KAZ.L: Quote, Profile, Research), Xstrata (XTA.L: Quote, Profile, Research), Anglo American (AAL.L: Quote, Profile, Research) and Vedanta Resources (VED.L: Quote, Profile, Research) were down between 1.7 and 3.3 percent.

Banks were another standout loser, with Barclays (BARC.L: Quote, Profile, Research), Royal Bank of Scotland (RBS.L: Quote, Profile, Research), Alliance & Leicester (ALLL.L: Quote, Profile, Research), HBOS (HBOS.L: Quote, Profile, Research), HSBC (HSBA.L: Quote, Profile, Research) and Lloyds TSB (LLOY.L: Quote, Profile, Research) all down between 0.4 and 3 percent.

Lehman Brothers has liquidated three floundering investment funds that lost value and ended up taking $1 billion of assets onto its balance sheet, according to a filing with the Securities and Exchange Commission.