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LONDON (Reuters) - The FTSE 100 suffered its biggest one-day fall in three months on Monday, as growing political uncertainty in continental Europe and a string of analyst downgrades sparked a wave of profit taking from 4-1/2 year highs.
The growing popularity of former premier Silvio Berlusconi ahead of elections in Italy and a corruption scandal in Spain fanned concerns that political instability could undermine the region's slow progress out of its debt crisis.
Any setback there is also likely to hit Britain, for whom the euro zone is the top trade partner, and whose corporates have already taken hits from problems in Southern Europe.
That, together with the hefty 7 percent rally in Britain's FTSE 100 so far in 2013 and the strong performance fuelled by new-month money on Friday, prompted some investors to cash in.
"It's just a bit of profit-taking today, it's been coming for a while. We were over-bought and we have seen a few guys come and look at names that have had big moves," said Martin Tormey, head of equity trading at Goodbody Stockbrokers.
"I don't think it's any more than that ... There is a lot of money sitting on the sidelines and we definitely sense from clients that there is a lot more fear of the market going up than of the market going down."
The UK blue chip index closed down 100.40 points, or 1.6 percent, at 6,246.84 points, retreating after posting its highest finish since May 2008 on Friday.
The banking sector, the most directly exposed to euro zone woes through their holdings of sovereign debt, was one of the worst performers, down 2.2 percent as investors booked profits on a rally of over 10 percent in early 2013.
Traders said the euro zone jitters - which pushed the yields on 10-year Spanish and Italian government bonds to 2013 peaks - were the main driver for the UK sector, overshadowing plans by Chancellor George Osborne for a new law to break up banks that fail to shield retail operations from risky investments.
"Obviously euro zone politics don't help the overall situation and the yield spikes in Italy/Spain 10-year bonds are arguably the bigger driving force behind today's selling than anything the Chancellor said this morning," said Matt Basi, head sales trader at CMC Markets.
Heavyweight energy companies also suffered, as oil prices retreated on concern over geopolitical tension in the Middle East.
Monday's FTSE 100 drop - the biggest since November - pushed the index below minor resistance at the 10-day moving average around 6,268.80, but that was not enough to cast a shadow over the broader uptrend that has been intact since June 2012.
"I would be more inclined to think that it's a correction rather than a trend-ending scenario," said Phil Roberts, chief European technical analyst at Barclays.
"Possibly it's a double top and if that's the case, we could be headed back towards 6,200 (points) before another move higher ... But should it start taking 6,186 then it could be something a bit bigger than we've been seeing of late."
Additional reporting by Alistair Smout; editing by Ron Askew