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LONDON (Reuters) - FTSE 100 finished lower on Monday, giving up initial sharp gains on news of a last-minute Cyprus bailout as investors fretted about the deal's implications for the rest of Europe and for its banking sector.
Cyprus secured the 10 billion euro (8.5 billion pounds) rescue from international lenders overnight, in exchange for shutting down its second-biggest bank. Although, crucially, it stuck to EU guarantees, protecting deposits of less than 100,000 euros, bigger depositors face large losses.
Comments from the head of euro zone finance ministers what the programme represents a new template for resolving the bloc's banking problems unsettled markets in afternoon trade.
The remarks hit sentiment across the European banking sector as a whole, including in euro outsider Britain.
Britain's FTSE 350 banking index closed down 1.1 percent, giving up earlier gains of as much as 1.7 percent and extending losses suffered last week in what was its worst weekly showing in 10 months.
"This morning I had covering of short positions, people getting squeezed up, and then it completely reversed," said Jordan Hiscott, sales trader at Gekko Capital Markets.
"Now we've got exiting of UK banks ... in large size. People are getting caught out on intra-day volatility."
The blue chip FTSE 100 index finished off 14.38 points, or 0.2 percent, to 6,378.38 after a failed attempt to move back towards a five-year high of 6,533.99 points set earlier this month.
In a volatile session, markets were rife with speculation on how Russia, many of whose wealthy citizen held money in Cyprus, could react to the deal. Moscow signalled it would backstop the bailout, despite signs of anger from some.
Continuing problems in Italy following last month's inconclusive general election also weighed on sentiment, with traders flagging the possibility of future ratings downgrades for the sovereign which is on 'negative watch' by all three of the main ratings agencies.
Realised 10-day volatility index on the FTSE 100 - based on open, high, low and close prices - picked up to its highest since mid-February, and its third highest since November.
Given the heightened volatility and with FTSE 100 investors sitting on gains of 8.1 percent since the start of 2013, traders said they expected profit taking ahead of a four-day Easter weekend with Thursday the final trading day of the quarter.
Banks, which are up 6.3 percent this year, were seen as key targets, given the recent concerns about the sector
"What concerns me is the potential volatility in the financial sector and we are seeing that now," said Chris White, UK equity fund manager at Premier Asset Management.
"I don't like necessarily being in volatile sectors that have had a good run, they are up for a bit of profit taking, so I have been top-slicing my exposure to some of the stocks in the sector (in recent weeks)."
For Monday, though, FTSE's losses were capped by a rally in Vodafone, the fourth biggest company in the index.
Shares in the telecoms firm added 2.0 percent, boosted by renewed speculation the telecoms company could be working towards a deal to either sell its 45 percent stake in Verizon Wireless in the United States, or merge itself with the Wireless unit's co-parent Verizon.
editing by Ron Askew